EUR/JPY Technicals – First sign of weakness seen in rally

As this week draws to a close, we are looking more likely to finally have 2 bearish candle in a row. Price has successfully posted week on week gain for 8 consecutive weeks, and though everybody believe prices were over extended, nobody could tell when the pullback will occur. Development over past 2 weeks has finally given us a hint that a significant pullback may be currently ongoing right now. Current weakness in EUR/JPY can be attributed primarily to EUR weakness, not least due to flailing GDP figures from both Germany and France – the 2 largest economies Euro-Zone has to offer. The extent of EUR weakness can be seen with EUR/JPY falling despite further Yen weakness post Bank of Japan’s rate decision statement, in which BOJ stated they are seeking to achieve price target “as early as possible”.

Weekly Chart

From weekly chart, 123.0 (swing high in Apr 2011 not shown on chart) may provide some support against the pullback, though Stochastic indicator suggest that the pullback may continue longer, with readings still firmly in Overbought region. A break of 123.0 opens up 118 support (May – Jun ’11 consolidation region) and subsequently 111.5 (swing highs of Nov ’11 and Apr ’12). However, such bearish follow-through requires either a total capitulation of EUR and/or shift in JPY sentiment as fundamental drivers. An EUR failure appears to be unlikely based on current evidences, but shifting of JPY sentiments may not be that far-fetch considering that we are approaching the final month of Japanese FY 2012. Seasonality teaches us that JPY tends to strengthen post March at the beginning of the new financial year. Evidence of such occurrence this year is still absent, and we could even miss it totally as Abenomics take flight to pummel Yen (and speculators – those accused by BOJ of strengthening Yen) into submission. Also, the market appears to be sensitive to “intervention talks” made by Central Bankers – see BOE King, RBA Stevens, ECB Draghi for their “all talk and no action” behaviors that has moved currencies tremendously. Should market revert to type and start to be skeptical of BOJ efforts as they used to do, sentiments of a weak Yen will quickly shift back to strength, bringing EUR/JPY lower.

6 Hourly Chart

Shorter-term chart also show further weakness unseen via the weekly chart. Price on 6 hourly has been posting lower lows and lower highs since 6th Feb. Also, we are looking at a Kumo Twist with price threatening to break the current Kumo it’s trading in. Price could still find some short-term support along 122.0 before opening up further downside objectives, which is in line with Stochastic telling us that current levels are slightly “Oversold”.

Ultimately, as market sentiment has been the key in EUR/JPY rally, it will be the catalyst that will break the EUR/JPY. Japan’s intervention action and intention to weaken the Yen has not been met with international displeasure, but that could change in current G20 meeting with Yen’s weakness high on the agenda list. Even if there isn’t any action taken against Japan, any strongly worded reprimand would certainly shackle further BOJ’s ability and willingness to ease, resulting in a swift change in market sentiment towards further JPY weakness.

More Links:
Japan Can Do What It Wants According To The G7
It’s Only Words But FX Is On The Move

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.