The Euro has been struggling a bit for some time, and this of course won’t be any different against the Japanese yen. What’s interesting about this pair is that we have recently filled a gap, which of course is a very supportive area. That being the case, one would expect to see buyers come back into the market, which they did do it eventually. However, they cannot hang on to those gains, and this suggests very ominous things for the global markets.
Risk barometer
The EUR/JPY pair has been very negative for some time, and when you look at this chart you can see that we have filled the gap, and then tried to rally for the last couple of weeks. However, we continue to see this market fail to hang onto the gains and this tells me that there are a lot of concerns out there when it comes to global growth, as we can’t get away from the Japanese yen. At this point, the gap being broken to the downside would be a very ominous sign, as it would show money flowing away from risk.
Why this risk barometer is about to kick off negative momentum
The risk barometer side of this trade is about to kick off from what I can see, as we also have the German economy looking very likely to head into recession now, and that of course weighs upon the Euro in general. That being said, the Japanese yen is a safety currency, so it makes sense that we would see money flow towards the Japanese yen globally. This will include the Euro obviously.
If we can break down through the gap which I have tentatively drawn as a dashed line on the chart, then it’s very likely that there will be a flush lower due to the stop loss is being kicked off. That will beget more selling, and then we could go down to the ¥115 level, possibly even the ¥109 level.
Technical analysis
EUR/JPY Weekly
The technical analysis for this market is very negative, not only due to the two negative candle stick from the previous couple of weeks, but the fact that we are at the bottom of the gap and continuing to press the issue. The 50 week moving average is on the chart above and sloping lower, and we are well below the 61.8% Fibonacci retracement level. That typically means that we will go hunting for the 100% Fibonacci retracement level eventually, so at this point that is my default scenario, but I do recognize that getting through the gap is the first step to the massive selling and therefore we must be patient.
My trade going forward
My trade going forward is to simply short rallies as they occur. Alternately, if we break down below the lows of the previous week, then I will consider the gap violated, and would be a seller at that point as well, hanging on for a move down towards the ¥110 level. I have no interest in buying this market right now, but I would have to rethink the entire situation if we were to recapture ¥120 on a daily close.
