Back in May, we highlighted the technical evidence supporting a EUR/JPY bounce from the 138.00 area, concluding that, “The combination of a clear candlestick pattern, long-term MA support, and an oversold market is the textbook recipe for a short-term rally, though the downward trending MACD suggests the medium-term momentum remains with the bears.”
The anticipated bounce emerged last week, but the rally stalled out almost exactly at previous-support-turned-resistance near the 1.40 level, and rates have shed nearly 200 pips from that barrier thus far this week. With the unit once again testing key support around 1.3800, another bounce is possible, but if that floor gives way, a tumble down to the 2014 low near 136.20 would come into play.
Tackling the fundamental backdrop first, the euro has been on the back foot throughout this week as traders continue to digest last week’s landmark Europen Central Bank decision. Today’s bearish catalyst came in the form of comments from ECB member Hansson, who argued that the central bank should develop a plan for introducing quantitative easing (QE) in case its necessary. While the powerful German Bundesbank still opposes outright money printing, the other ECB members appear to support the notion, increasing the likelihood that the ECB could ease further in the months to come.
Looking to the chart, this news pushed the EUR/JPY to close below its 200-day moving average for the first time since November 2012. Meanwhile, the secondary indicators are also painting a bearish picture. The MACD is below the “0” level and about to cross back below its signal line, showing a shift to strongly bearish momentum. Meanwhile, despite last week’s bounce from oversold territory, the RSI remains well within bear territory (i.e. it continues to find resistance at 60).
As we noted above, the pair is testing previous support around 1.3800, but if the 78.6% Fibonacci retracement at 137.80 is broken, bears would turn their eyes toward the 2014 low at 136.20 next. On the other hand, only a rally back above key psychological resistance at 1.40 would shift the bias back to the neutral in our view.