USDJPY and EURUSD Technical Analysis

The Bank of Japan is committed to “powerful monetary easing” in the oft-spoken words of its Governor, Haruhiko Kuroda, until annualized consumer price inflation tops 2%. Well, it’s now at 0.7% and holding so that easing could yet be with us for years. Meanwhile the US Federal Reserve has raised its own interest rates from their post-crisis depths. It’s still expected to do so once again in December and to continue the process in 2018 if the economics permit, albeit gradually.

This thesis has seen USD/JPY rise very sharply since early September but, tellingly, the Dollar remains unable to convincingly top the last two notable highs.

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A lot of noise was made when EUR/USD broke the ‘neckline’ of the ‘head-and-shoulders’ top, and we were indeed onboard with what was presented to us as a valid confirmation of the three-month pattern. However, last week’s surge pushed the euro well above the ‘neckline’ and the trend-line running down off the September high. The combination of technical breaches significantly decreases the likelihood of the ‘H&S’ pattern still holding any real weight. One could say the formation isn’t fully wrecked until we see the euro trade above the ‘right shoulder’, but with the sturdy trend-line broken along with the ‘neckline’ the probability of the formation becoming fully invalidated rose sharply last week.

This doesn’t mean EUR/USD is in the clear for higher prices just yet, though. The downtrend off the September high remains intact for now with the series of lower-lows and lower-highs still in place. It’s possible the Wednesday reversal-day marked the next lower-high in the sequence. This makes that particular day, and even more importantly, the area around 11876 so crucial. It’s the 2010 low, which is why it has received so much attention in recent months as both support and resistance. Strong clearance above will be needed before the euro can run. If we see a solid close above, preferably into the 11900s, the area surrounding the 2012 lows between 12000/100 or higher will come into focus.

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EURUSD: Retail trader data shows 29.9% of traders are net-long with the ratio of traders short to long at 2.35 to 1. The number of traders net-long is 12.7% lower than yesterday and 23.3% lower from last week, while the number of traders net-short is 6.2% lower than yesterday and 15.8% 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. Traders are further net-short than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger EURUSD-bullish contrarian trading bias.

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The Euro is struggling to make upward progress after pushing past resistance that had defined the down trend against the US Dollar since early September. The breakout suggested that the dominant 2017 advance was back in play but follow-through has been cut off ahead of the 1.19 figure, at least for now.

From here, a daily close above support-turned-resistance at 1.1857 opens the door for a challenge of the 23.6% Fibonacci expansion at 1.1967. Alternatively, a reversal back below the 1.1662-79 area (August 17 low, 23.6% Fib retracement) paves the way for a retest of the November 7 low at 1.1553.

Prices are too close to immediate resistance to justify entering short from a risk/reward perspective. On the other hand, the absence of an actionable bearish reversal signal warns against taking up the short side. With that in mind, opting for the sidelines seems most prudent until a better trade setup presents itself.

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Coming into last week we were looking for EUR/USD to possibly test, but not break, important bottom and top-side levels. On Tuesday, the euro came down very near the support-zone surrounding 11700 before launching higher. Friday’s rally did, however, see prices break on through resistance around the 11876-threshold (2010 low) which has been a big focal point since August.

Closing the day, week in the 11900s is important because it not only leaves the ‘head-and-shoulders’ pattern completely in the dust with a break above the ‘right shoulder’, but also opens up a path to the year-high at 12092. The area surrounding the 2010 low will once again go from resistance to a source of support. If the rally is to pick up steam, then we shouldn’t see a lasting move into the 11800s. Helping provide further support on any weakness is the tend-line off the month low, so even if a modest dip below unfolds there is trend support to help keep a bid in place.

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EURUSD: Retail trader data shows 29.4% of traders are net-long with the ratio of traders short to long at 2.4 to 1. The number of traders net-long is 8.5% higher than yesterday and 8.7% lower from last week, while the number of traders net-short is 0.4% lower than yesterday and 4.2% higher 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. Positioning is less net-short than yesterday but more net-short from last week. The combination of current sentiment and recent changes gives us a further mixed EURUSD trading bias.

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Heading into last week we were optimistic on the prospect of a higher EUR/USD, and while it was relatively unchanged when the dust settled there is reason to believe we will see higher prices in the days ahead. But if the euro doesn’t get into gear soon it runs the risk of breaking lower. So, we’ll approach this with an objective eye and continue to lean on the trend-line rising up from last month’s low as key to the near-term outlook. It was thoroughly tested during a 24-hr stretch on Thursday and Friday. There was some ‘help’ Friday on the Flynn/Trump headline which spooked dollar longs across the board, but looking at this from a pure technical standpoint – the line held. As long as it continues to do-so, then a rally is seen as likely to continue to mount towards the yearly highs.

Levels on the top-side to watch are 11961, 12005, 12034, and then the big high at 12092. We may or may not see the yearly high challenged this coming week, but we’ll stay the course as long as there isn’t a break back below the aforementioned trend-line, and at worst, if that trend-line breaks we’ll give it to last week’s swing-low at 11809 before turning neutral at the least, if not flipping the script all together. In which case, attention will be placed on the area surrounding 11700 as it has been quite important on several occasions August.

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The near-term USD/JPY candlestick version makes it look as though a head and shoulder pattern may be in the offing. After all the current climb seems to be losing momentum already, before it gets anywhere near the previous peak of 114.72. And it’s losing momentum just about exactly where the putative first shoulder was made. Should the second be confirmed by a marked move lower from current levels then the entire climb up from September’s lows in the 107 region could be in some jeopardy.

It’s also worth looking at the range which has essentially contained USD/JPY all year. To be sure it is broad, taking the pair from the 107-region up to the 114s. But it has endured through all of 2017’s fundamental twists and turns and it is probably safest to assume that it still does, in the absence of clear evidence to the contrary.

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Euro selling pressure struggled to sustain momentum after a 6-day losing streak brought the currency to the lowest level in three weeks against the US Dollar. Still, a break of rising trend support set from early November seems to suggest the near-term bias continues to favor weakness.

A break below the 38.2% Fibonacci expansion at 1.1756 confirmed on a daily closing basis sees the next downside barrier at 1.1692, the 50% level. Alternatively, a bounce back above the 23.6% Fib at 1.1834 opens the door for a challenge of trend line support-turned-resistance, now at 1.1934.

The short EUR/USD position triggered at 1.1824 hit its initial profit target and partial profit has been booked. Remaining exposure continues to be in play to capture any follow-on weakness. The stop-loss has been trailed down to the breakeven even level.

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EURUSD: Retail trader data shows 44.5% of traders are net-long with the ratio of traders short to long at 1.25 to 1. The number of traders net-long is 6.5% higher than yesterday and 15.5% higher from last week, while the number of traders net-short is 5.1% higher than yesterday and 11.8% 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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