Underscoring investors’ on-going insatiable appetite for risk, the benchmark stock indices in Germany and the UK hit new record highs today. The commodity-heavy FTSE 100 rose on the back of a sharp rally in the price of oil while the DAX was boosted by news German Chancellor Angela Merkel won in a local regional election. As a result of the oil and stock market rally, commodity currencies outperformed while perceived safe haven yen and dollar both fell.
The euro continued its recent ascent thanks to the market-friendly outcome of the German regional election, and previously the French general election. When the single currency rises in a “risk on” market environment, the euro/Japanese yen (EUR/JPY) currency pair is usually the euro pair that tends to outperform as the safe haven yen takes a back seat.
Indeed, the EUR/JPY has confirmed its recent breakout above the key 124.00 handle by forming a new high today after a period of bullish consolidation, which is usually characterized by a modest – often choppy – retracement after a sharp rally. After a lengthy period of range contraction, the market digested all the available news and decided to push further higher. Thus, the point of origin of this latest phase of the rally needs to be monitored closely in the event the buyers show an unwillingness to bid the pair meaningfully higher. Specifically, a potential break below today’ low around 123.60 would invalidate this bullish breakout. However, for now the path of least resistance is to the upside until such a time we see a reversal pattern unfold at higher levels or 123.60 breaks down first.
With that in mind, it is better to now focus our attention on the upside and so the next bullish objective would be at the psychologically-important 125 handle. Beyond this, the prior reference points at 126.45 and 128.15 would probably become the next targets for the bulls. It might be a bit premature but 129.50-130.00 may be in the bulls’ radars, too, now. This area marks the projected point D of an AB=CD price pattern. In addition, the 161.8% Fibonacci extension level of the drop from point B meets the 50% retracement of the long-term bear trend here.
All this makes it a key technical level, not to mention the importance of the psychological 130 handle. But let’s not get ahead of ourselves, because in the event the noted 123.60 level breaks then all bets would be off. In this potential scenario, I wouldn’t be surprised if the EUR/JPY were to stage a sharp sell-off.