USDJPY and EURUSD Technical Analysis

The Nikkei 225 looks quite comfortable around the big, 20,000 level. But how much higher does it want to go?
Well, assuming that you’re a Nikkei bull, we’ll start with the good news. The index is still clearly within the uptrend channel which has marked its long and quite impressive rise from the lows of mid-May. That gain has taken the Tokyo equity benchmark to two-year highs and seen it top that psychologically important 20,000 mark which it remains above.

Indeed, the more recent bumpy, sideways slog across the channel’s lower reaches makes it more likely that the index has in fact been consolidating for the past month or so. For sure it has done so in a higher range than that which came before, but it remains to be seen whether that consolidation marks a top or a base for a push yet higher.

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The closing levels of May 15 (113.64) and 16 (112.80) are possibly significant as both days hit the market with sharp falls. While USD/JPY did manage to poke its nose above that second resistance level this week, it only did so once and on an intra-day basis, on Thursday.

Those resistance levels will have to be overcome if the pair is to move up and away from the broad range trade which has been in place since May 17, between 112.78 and 109.25. USD/JPY’s inability to crack them doesn’t necessarily mean a catastrophic fall, but it does suggest that that range trade will endure.

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Retail trader data shows 26.8% of traders are net-long with the ratio of traders short to long at 2.73 to 1. In fact, traders have remained net-short since Apr 18 when EURUSD traded near 1.06424; price has moved 6.6% higher since then. The number of traders net-long is 0.5% higher than yesterday and 31.2% higher from last week, while the number of traders net-short is 6.3% lower than yesterday and 4.8% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests EURUSD prices may continue to rise. Yet traders are less net-short than yesterday and compared with last week. Recent changes in sentiment warn that the current EURUSD price trend may soon reverse lower despite the fact traders remain net-short.

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Last week – EURUSD – after running sharply higher from a pullback ran into resistance by way of a trend-line extending lower from the August 2015 peak over the 2016 high. In this vicinity also lies several swing highs as far back as early 2015, with the most recent turning points coming during the first-half of 2016. The confluence of swing-highs and long-term trend-line make the mid-11400s an important inflection point, and a formidable area for buyers to push the single-currency through.

Looking at one-week implied volatility (currently at 7.3%), the projected one-standard deviation projected high clocks in at 11481, which is 36 pips above last week’s top. It suggests we may see a move beyond the beforementioned resistance and depending on momentum at the time it could turn out to be a meaningful breakout which could expose the 2016 high at 11615.

Looking lower, the projected one-week low is at 11251, which falls just below solid horizontal and trend-line support. Giving the benefit of the doubt to the strength of the trend and support the lower-bound looks less likely to be breached looking out over the next week. A decline to the 11300/285 area may present an attractive spot for would-be longs to enter. If, however, we see a close below the trend-line and support then a move back towards 11100 (200-day MA at 11446) may be in the works. A daily closing bar below support would be our cue that the lower range threshold may be underpriced and selling could become aggressive.

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On Friday, USD/JPY broke above 114 for the first time since May in large part due to persistent JPY weakness that was catapulted by a BoJ offer. The Bank of Japan offered to buy unlimited bonds at a fixed rate to help limit front end bond yields and emphasize their Yield Curve Control (YCC) approach to monetary policy. However, there were no tenders, which could mean we’ll see further JGB flattening in the near term as we see across the world. The takeaway message here is that the BoJ is actively engaged as other central banks (we’re looking at you ECB & BoC) are actively disengaging from their prior dovish stances, which could lead to persistent upside in EUR/JPY and CAD/JPY.

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USD/JPY had just forced an upside trendline break and the previous significant high – May 10’s 114.37 – was within striking distance. The Dollar got there alright, breaking in to the 114.40s on July 11, but victory was partial. It only managed to top that summit intraday, still hasn’t managed a higher daily close and has now retreated below.

That channel neatly captures all the trading action from June 14’s low to the present day, but it may also offer something of a false positive. After all, the lower bound consists of precisely one intraday low, only about 48 hours old at the time of writing. The amount of reassurance this chart offers bulls must surely be limited.

The trendline below on the other hand passes through three intraday closing levels and two intraday lows. From that point of view, it looks more significant and, as you can see, USD/JPY broke below it this week.

The pair is currently very close to support around 113.11. That was July 6’s close and a region around which which had coalesced around for the four previous days. There would also appear to be support around the 111.96 mark.

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Heading into last week and the ECB meeting we held a bullish outlook for the euro, with eyes for the 2016 high over 11600, and on a push through that level would bring into play the August 2015 high sitting just north of 11700. To close out last week the euro finished between the two eyed thresholds. The path of least resistance is clearly higher, but from a risk/reward perspective chasing the current up-move into resistance without a correction isn’t particularly attractive. At any point here we could at the least see a minor retracement if not something more. However, with that said, when a trend gains as much traction as EURUSD has there is always the risk that we see one side of the market (shorts) throw in the towel, resulting in a sharp squeeze.

We have a catalyst this coming week which has potential to do just that, as the FOMC is set to release its decision on interest rates and policy statement. Rates are expected to remain unchanged, but any material signaling for the September meeting could have a sizable impact on the US dollar. Join us live for FOMC coverage on Wednesday.
If the euro continues to gain steam and breaks the August 2015 high at 11714, the next natural level of resistance doesn’t arrive until the 2012 low at 12041. It seems unlikely, though, such heights will be reached in the coming week – it would be quite the move. Some back-and-forth seems likely to take place prior to Wednesday between ~11600 and ~11700. After that, we’ll have a clearer picture as to how things will unfold.

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EURUSD: Retail trader data shows 24.6% of traders are net-long with the ratio of traders short to long at 3.06 to 1. In fact, traders have remained net-short since Apr 18 when EURUSD traded near 1.06665; price has moved 9.2% higher since then. The number of traders net-long is 12.6% higher than yesterday and 0.3% lower from last week, while the number of traders net-short is 3.3% higher than yesterday and 7.9% higher from last week.

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EUR/USD captured headlines today as it printed a fresh 2.5 year high on the heels of Yellen cautiously looking at inflation. We have been bullish EUR/USD since May 22 targeting a retest of the 1.16 highs. Now that we have arrived, what’s next? Is this new 30 month high a fresh breakout or a fake out to draw the bulls in? The model we are following shows the shorter term trend may be nearing the end of this upward trend. Multiple models are pointing to a sell off towards 1.1250-1.1400. From there, the models begin to diverge.

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Retail trader data shows 25.2% of traders are net-long with the ratio of traders short to long at 2.96 to 1. In fact, traders have remained net-short since Apr 18 when EURUSD traded near 1.06707; price has moved 10.5% higher since then. The number of traders net-long is 10.7% higher than yesterday and 14.8% higher from last week, while the number of traders net-short is 1.4% higher than yesterday and 6.3% lower from last week.

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