USDJPY and EURUSD Technical Analysis

Looking ahead to next week the euro is set up for further losses as the path of least resistance has turned lower. Looking to a capper on any further strength there is resistance in the 11825-11880 area (old support becomes new resistance). As long as the euro stays below this area a downward bias will remain firmly intact.
Looking lower towards support eyes will be on the August low at 11662 and the 2016 high of 11616, of which the latter just happens to align almost precisely with the measured move target of the ‘head-and-shoulders’ pattern (determined by subtracting the height of the pattern from the neckline).

Bottom line: Shorts look set to have the upperhand as a fresh month gets underway as long as the euro remains capped by resistance. On weakness, we’ll be watching how the euro responds to a drop into support levels.

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The Japanese Yen has been hammered by US Dollar bulls in the past month, to an extent quite unusual this year.
The greenback has risen by nearly six full Yen since its lows of early September, as investors looked at stronger US economic numbers and a Federal Reserve still apparently intent on raising interest rates in December should those numbers hold up.

By contrast in Japan ultra-loose monetary policy still rules and, while consumer price inflation is clearly rising in a way sure to please its own central bankers, a sustainable 2% rate remains a distant and possibly unrealisable dream. The resulting, wider yield gap in US Treasury’s favour hit the Yen too.

That quick fundamental detour aside, however, USD/JPY has clearly been in some sort of topping out process since September 21 and, although the days since include the current rally’s highs, the bulls seem be pausing for breath, at least.

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USDJPY short-term implied volatility may be underpricing a sustained breakout from the recent trading range; downside looks like the biggest risk at the moment. When comparing 1-week to 1-month implied volatility the shorter dated options are pricing in less movement in USDJPY in the near-term than their longer-dated counterparts. One-month IV is at 9.18% while one-week is at only 7.97%. Volatility has been on the decline in recent weeks and the trading range in the Yen highlights this. The fact the currency has a ‘risk-on, risk-off’ component to it only helped push volatility lower as risk appetite for stocks has been strong, compacting volatility in major equity indices as evidenced by the CBOE VIX index (S&P 500) which continues to hover around 10.

Related events/data: The BoJ’s Kuroda will be speaking at 12:30 am GMT time on Tuesday; FOMC September meeting minutes on Wednesday; CPI, Advance Retail Sales, and UofM Confidence on Friday.

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USDJPY: Retail trader data shows 41.6% of traders are net-long with the ratio of traders short to long at 1.4 to 1. The number of traders net-long is 1.1% higher than yesterday and 12.4% lower from last week, while the number of traders net-short is 17.3% higher than yesterday and 31.1% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests USDJPY 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 USDJPY-bullish contrarian trading bias.

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The Euro has mounted a spirited recovery against the US Dollar after finding support near the 1.17 figure but the dominant trend bias still favors weakness. Near-term positioning continues to be defined by a series of lower highs and lows, painting recent gains as corrective (at least for now).

From here, a daily close above the 1.1900 figure (trend line, 23.6% Fibonacci expansion) opens the door for a challenge of the 1.2041-70 area (38.2% level, August 29 high). Alternatively, a reversal back below the 14.6% expansion at 1.1812 exposes the 1.1711-21 zone (38.2% Fib retracement, October 5 close).

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The outlook for EURUSD heading into last week was for a bounce to develop, but that was all it was expected to be – a bounce. And now with resistance standing in the way and a broad topping formation dating back to early-August coming further into view, we’re ready to shift into reverse. The area from 11825 to 11880, as we noted a week ago, is viewed as a fairly formidable area of resistance. Should we see resistance hold as reliable and a decline soon develop, the ‘right shoulder’ of a ‘head-and-shoulders’ pattern could become cemented.

Support on weakness will come in at the neckline of the pattern, which arrives near the monthly low at 11669. Given the lack of recent volatility a break below there may not develop in the days ahead, but if we see a closing bar below the ‘neckline’ of the formation then a much broader move lower is expected. For now, though, the ‘neckline’ will be viewed for what it is – support. A strong push beyond the 11880/910 area will be needed if the bounce is to potentially develop into something more meaningful.

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The timing of the nearly completed pattern and next week’s highly anticipated ECB meeting is certainly intriguing. It’s the type of clash or confluence between the technical posturing and a fundamental catalyst which could set into motion one-way trade for the foreseeable future. It appears, though, that a move higher will be the tougher road given the long-term levels in place from 2010-2012. On the other hand, a confirmed break of the ‘neckline’ should offer up the cleaner trade.

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EUR/USD Forecast - Still in Triangle (H4)

Though we cannot say for sure which of the patterns we are in, I am leaning towards a continuation of a fourth wave triangle. The triangle pattern implies EUR/USD remains supported above 1.1662 and moves into the 1.19 handle, possibly as high as 1.20.

If the fourth wave was a flat pattern and if the flat has previously ended then it implies we are travelling higher in the fifth and final wave. Under this scenario, EUR/USD likely breaks above 1.20 and may move as high as 1.22.

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For starters, we may very well see a bounce and retest of the neckline around the 11670-threshold. Retesting the ‘neckline’ is a fairly common occurrence and can offer traders a spot to establish (or add to) short positions. We may even see a stronger bounce develop back above resistance, but is likely to prove short-lived if the topping formation is to exert downward pressure. At this time, it will require a move above the trend-line running down off the September high and overtaking of Thursday’s sharp sell-off to bring pause to last week’s break.

Looking lower, there is support not far below at the lower parallel tied to the trend-line off the September high. After this minor level of support, nothing meaningful arrives until 11429, 11366, 11298, and the 200-day MA (currently 11243, but rising). The ‘measured move target’(MMT) clocks in at ~11240. The ‘MMT’ is calculated by simply subtracting the height of the pattern (head to neckline) from the neckline. It’s a symmetry-based target.

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On an intraday basis, we can identify an impulse wave lower. Impulse waves can make up larger impulse waves or they can be embedded in the sub-structure of a corrective wave. Regardless of the larger pattern EUR/USD is building, we can count the five wave impulse as completed. The Relative Strength Index divergence on the 4 hour chart is consistent with a fifth wave. Therefore, the higher probability move is a bounce back to 1.17.

Bottom line, the higher probability EUR/USD move is a bounce higher towards 1.17. Depending on the structure higher will then begin to eliminate the continued bullish pattern or if the bearish resolution prevails.

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