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Downside Potential on EUR/JPY Gathers Pace

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EUR/JPY POTENTIAL DOWNSIDE CONTINUATION

Recommended by Zain Vawda

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EUR/JPY OUTLOOK

Markets and a variety of asset classes have been stuck in ranges of late with the JPY pairs proving to be somewhat of an exception. The recent selloff followed by a swift recovery thanks to safe haven demand leaves EURJPY relatively flat over the past four weeks. The Yens initial selloff was inspired by the BoJ meeting with new Governor Kazuo Ueda announcing no immediate changes to monetary policy yet change feels imminent. There was an announcement about a review of monetary policy over the next 18 months, but markets were looking for a more decisive and swift response.

The selloff was followed by renewed US banking sector and recessionary fears which saw the Yen benefit and strengthen across the board. The European Central Bank (ECB) arrived and as expected a 25bps coupled with hawkish rhetoric which has since continued. Euro weakness has prevailed since the ECB meeting, which is a surprise however, I do not see ECB policymakers able to adopt a more hawkish stance than they have of late. This leaves the Euro in a slightly precarious position as indicated by the failure of EURJPY to print a fresh high in the aftermath of the ECB decision.

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The lack of follow through coupled with no real hawkish surprises from the ECB left leaves me to favor further downside on EURJPY. I also expect the Bank of Japan (BoJ) to make a change to monetary policy but not in any timeframe that would affect this trade. The technical do support a short side bias on EURJPY as you will see in a moment.

EUR/JPY Daily Chart – May 10, 2023

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image1.png

Source: TradingView

On the daily chart above we finally closed below the trendline yesterday with a retest occurring today before downside continuation. Short from here does affect the risk-to-reward ratio on the setup slightly but I will break it down on a smaller timeframe, however targets are around 500-600 pips away and this could take as much as 2 weeks (or longer) to play out.

There are a few potential entry and exit opportunities here with immediate support resting at 146.60. A daily candle close below this level could see a push toward the 50-day MA before the overall targets resting around 143.40 (100-day MA) and 140.50 respectively.




of clients are net long.




of clients are net short.

Change in Longs Shorts OI
Daily 10% -5% -1%
Weekly 86% -11% 4%

EUR/JPY Two-Hour Chart – May 10, 2023

image2.png

Source: TradingView

Dropping down to a 2H chart and looking briefly at the IG client sentiment data there is a chance for a short-term bounce for EURJPY. A pullback toward the key resistance area around 148.28 where the 50-day MA has just crossed below the 200-day MA (death cross) provides a great risk-to-reward opportunity for would be shorts to get involved.

The bearish setup will remain valid until we have a daily candle close above the 148.75 mark.

Key resistance levels:

Key support levels:

  • 146.60
  • 145.30 (5o-day MA)
  • 143.40 (100-day MA)

Written by: Zain Vawda, Market Writer for DailyFX.com

Contact and follow Zain on Twitter: @zvawda





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