EURJPY Finds Support but Remains Weak Ahead of Retail Sales and Rate Decision

by on February 5, 2014 6:10 am BST

The euro has made a 10-week low against the yen prior to the European retail sales data that is likely to show that sales have declined throughout the euro-bloc. Tomorrow, the European Central Bank (ECB) will issue their benchmark rate decision, which is likely to stay at the historical lows of .25 percent, and traders will listen closely for particular language out of the ECB.

The yen has roared back from its crash landing in 2013, gaining almost  six percent year-to-date. This is primarily due to the risk-off attitude traders and investors have had going into 2014 as the Federal Reserve reduces bond purchases, China is slowing down, and emerging market volatility continues. Pacific Investment Management Co. (PIMCO)’s Bill Gross said that risk assets remain vulnerable and is causing a demand for safe currencies.

The EURJPY was a very successful carry-trade (which has seen a reversal in the new year) as it tracked equity prices. The pair has seen a appreciation of over 2,700 pips from its year low-to-high. Currently trading at 137.08, the EURJPY has seen a fall of 800 pips from the top, and it is likely to continue as the euro will weaken throughout 2014 as long as the euro zone’s economic climate lags its global peers.

On the daily chart, the EURJPY will see price action support at 136.40, which it has since bounced off of, and 135.15. Resistance will likely be found at 138.05 and 140.50. The RSI is showing near oversold conditions at 32, but yen pairs are volatile and can trade in extreme ranges for extended periods of time.

The ADX is also increasing, potentially signaling for stronger momentum moves. Unfortunately, a bearish 20/50 EMA crossover is forming, and it is likely to extend into the 72 EMA. This could accelerate the pair lower and attempt to test 135.15. If so, the 200 EMA will be the next probable target at 133.28.

If the ECB handouts tasty tidbits, traders will gobble them up, and we could see the pair testing 138/9. However, the mid- to longer-term outlook still remains negative.

1D Chart of EURJPY

1D Chart of EURJPY