USDJPY and EURUSD Technical Analysis

The euro concluded the first week of the year effectively where it started, with see-saw price action dominating trade. The indecision comes as no surprise given where it is currently trading. Last year’s high arriving around the 2012 low led to a fairly lengthy correction.

EUR/USD will need to break above 12092 to further along its move higher. The channel dating back to mid-December keeps the near-term bullish trend structure intact. As long as the lower parallel holds, then it shouldn’t be long before a breakout develops.

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Traders around the world on Tuesday woke up to a surprise BoJ development that may seem small on absolute terms, but could lead to a broader shift in their Quantitative & Qualitative Easing Program (QQE.)

The Japanese Yen, which has been the last currency whose central bank in the G4 is limiting discussions on when they will remove their easing program to support the economy notified markets that they were reducing their purchases of super-long bonds, which caused rate prices to drop and yields to jump. This may be a far cry from a taper announcement, but given that the bond bull market has been supported by fewer central bank buyers, another central bank pulling back could be cause for natural concern.

The Bank of Japan’s surprise statement that they will not buy as many long-end bonds as they had been caused investors to be cautious on US notes too. The action sent the US 10Yr note (IG CFD: US 10-Year T-Note) yield to a nine-month high at 2.53% as the inversely related price fell to a nine-month low.

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The Japanese Yen has posted strong gains against the US Dollar in the past week, taking USD/JPY back to lows not seen since mid-September last year.
The fundamental justification for these moves is clear enough. The greenback has been under general pressure thanks to increasing market certainty that other developed markets will see tighter monetary policy in due course, crowding a field which for much of last year belonged solely to the US Federal Reserve. The Eurozone is held to be the most obvious candidate as stronger economic data see bets rise that stimulus withdrawal will accelerate.

The Yen has had a specific, domestic driver, too, even if its rationality is open to question. The Bank of Japan trimmed ever so slightly the amount bought at its regular bond-market operations last week. This was seen by the market as a sign that even Japan’s extraordinary accommodative monetary policy could be tightened and the Yen duly rose. Now the Bank of Japan has effectively denied the markets’ implicit charge since. It has stuck to its ancient line that all current settings will remain in place until inflation rises sustainably. But the Yen has not weakened, suggesting perhaps that the markets do not wholly buy this line.

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Euro technical positioning is warning of a turn lower against the US Dollar once again after the single currency rose to the strongest level since December 2014. Negative RSI divergence points to ebbing upside momentum andthe appearance of a bearish Evening Star candlestick pattern may precede a top.

Near-term support comes in at 1.2164, the January 18 low, with a break below that opening the door for a retest of former resistance marked by the September 8 high at 1.2092. Alternatively, a push above the January 17 high at 1.2323 clears the way for a challenge of the 38.2% Fibonacci expansion at 1.2458.

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Is the euro there yet; that is, has it arrived at a point where it could undergo a correction, or worse? It’s certainly in an area where a turnaround could develop. There is a trend-line running down from the top in 2008, clocking in around the current vicinity to a little higher. For a time-frame this long, you need to pull out the monthly chart and use a crayon versus a pencil to draw the trend-line. When you look at this way, then EUR/USD is trading up against a critical spot near the 12600-handle.

On Thursday, we saw a strong key-reversal bar carved out. If the high of the candlestick at 12537 isn’t soon overcome, look for the euro to begin trading lower in the days ahead. These types of powerful reversals tend to lead to turnarounds fairly quickly, however; in the event EUR/USD moves sideways, with each passing day, the likelihood increases that we’ll see a breakout above.

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The Euro has paused to digest losses after touching the lowest level in a month against the US Dollar but overall positioning hints further weakness is ahead. The single currency appeared to mark a top below the 1.26 figure last week having broken the series of higher highs and lows set from early January.

From here, a daily close below the 38.2% Fibonacci retracement at 1.2162 opens the door for a challenge of the 1.2046-70 area (50% level, resistance-turned-support). Alternatively, a move back above the January 17 high at 1.2323 sees the next major barrier at 1.2538, the January 25 top.

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The Japanese Yen has come under a bit of unfamiliar pressure against the US Dollar in the past week but it may be too early to call an end to a run of gains which have taken it to highs not seen since late 2016.

A so-far modest but broad US Dollar resurgence has seen USD/JPY rise for four straight sessions to the end of Tuesday’s action. This is the longest winning streak seen for the duration of the long fall from the highs of January 8.

Still, as you can see from the chart above the downtrend channel plotted remains very much in place and the Dollar’s current pep looks little more than corrective so far. It had become extremely oversold last week, for one thing, according to its Relative Strength Index. This week will also see the release of policy-meeting minutes from the US Federal Reserve. These are expected to set the stage for an interest rate rise next month, and perhaps leave the door wide open to many more. With such a key event looming it is perhaps natural that some player should lighten up on their more extreme short positions.

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Last week, EUR/USD pulled back from the 2008 trend-line in-line with expectations, continuing the theme of weak one week, strong the next, back to weak again. Will the next sequence play out to the upside in the week ahead, continuing the back-and-forth period indecision?

Giving support at its feet and the overall trend the benefit of the doubt, yes, that looks like the most likely outcome. There lies a short-term trend-line from mid-January crossing under Thursday’s low. That could break, though, which wouldn’t be bearish just yet as there is a much more important line of support not far beneath dating back to May 2016.
As long as the long-term slope holds, then the euro can still maintain a fairly positive posturing. Slip below, and swing-lows carved out in the last few weeks near 12200 will quickly come under fire, along with the breakout level (high of 2017 at 12092).

All-in-all, heading into the new week the euro is still given the benefit of the doubt for another push higher, but should levels start breaking on the downside then the 2008 trend-line may have marked an important high, at least in the intermediate-term.

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USD/JPY has now fallen to levels not seen since late 2016 before Dollar’s ‘Trump trade’ bounce, which came as markets got used to the shock election of the current US President. Moreover, there are few obvious signs that a turnaround is in sight.

The pair is certainly lower now that it was then, but it seems to be making a moderate attempt to base around the 105.40 area which has held for the past four days or so. As you can see from the chart below this area is closer to the channel’s top than it is to its base.

Should these levels continue to hold then US Dollar bulls might fancy the chances of a foray towards than channel top. However, that’s still almost a full Yen above current levels and it’s hard to see where that sort of momentum will come from on current showing. There’s also likely to be a degree of fundamental caution this week thanks to the wait for Friday when official US payroll data will be released.

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The question to whether the euro is topping or undergoing a healthy correction of course awaits its answer, but there are a couple of signposts to watch. This coming week could go a long way towards getting closer to our answer. Heading into last week, we were looking for a bounce to eventually stall and turn down, putting in a lower-high from the double-top formed around the 2008 trend-line. Following the ECB and Friday NFPs, the decline off the weekly high looks to have cemented a lower-high.

At first glance this could be a bearish development, and while the tone is set for lower prices in the short-term, support in the vicinity of 12150/100 will be quite impactful to the broader outlook. How the euro reacts to support (should it test it) will be telling as to whether the price action dating back to January is corrective or of the topping variety.

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