Euro Technical Outlook: EUR/USD Test II at 1.0500, EUR/JPY Breakdown

Euro Talking Points:

• The single currency has been weak against both the US Dollar and Japanese Yen of late.
• EUR/USD is testing the 1.0500 level for a second time and earlier in the week, it looked like bulls would try to run a pullback from the first test. But as I said in the Tuesday webinar those tests of long-term levels can be messy, and that’s what’s over the past couple of days with price going down for another re-test as of this writing.
• EUR/JPY on the other hand could be a more attractive venue for Euro bears, especially given the recent injection of Yen-strength. I looked at the pair yesterday as a key point of resistance was holding on the chart.

EURUSD AD

The Q4 sell-off in EUR/USD hasn’t given way yet, although it was looking hopeful for bulls trying to bid swings earlier in the week. I looked at this in the webinar as there’d been a show of defense above the 1.0500 level that came into play last Thursday, leading to a series of higher-lows. But, the 1.0611 Fibonacci level traded later that night, and that led to another crush from sellers that made a fast run back towards that major psychological level.

But – that prior sell-off couldn’t quite cross the 1.0500 barrier and from the daily chart, there’s been continued defense of the big figure.

I talked about this at-length in the Tuesday webinar, but these types of tests can take time, and it’s rare that there’s a cut-and-dry reversal, such as what was being teased then. When the 1.0500 level came into play in Q4 of last year, it was tested for about four weeks before bulls could ultimately begin to start taking control again. And in that instance, there was even testing below the big figure, with sellers driving about 50 pips lower before ultimately being rebuffed by bulls. That episode highlighted a degree of capitulation, similar to what showed on the other side of EUR/USD at the 1.1200 handle in late-September.

At this point, sellers are going down for another test of the 1.0500 psychological level, and this can be a very difficult move to chase. 

EUR/USD Daily Chart

EUR/USD Bigger Picture

For some perspective we can draw back to the weekly chart and see that the pair is still within the two-year range. This also highlights last year's test at the 1.0500 level, with the big figure not being the absolute low as that showed about 50 pips lower. So, while bears do remain in-control, the challenge at this point would be chasing a move at a really big spot of longer-term support on the chart. 

EUR/USD Weekly Chart

EUR/JPY

While EUR/USD has been indecisive this week, EUR/JPY has been a bit more directional. I looked at the pair yesterday when looking across the Japanese Yen and as I shared then, this could be an attractive venue for those looking for Yen-strength. On that topic, there’s an upcoming policy review from the Bank of Japan expected next month, and in a speech last night, BoJ Governor Kazuo Ueda sounded somewhat hawkish which has led to a run of Yen-strength against all of USD/JPY, GBP/JPY and EUR/JPY.

In EUR/JPY, there’s been a recent build of bearish structure and if that Yen-strength theme does continue to play-out, given the backdrop of economic weakness in the Euro-zone which has helped EUR/USD to fling all the way down to 1.0500, the single currency could be an attractive venue for looking for JPY strength to continue.

As of yesterday’s article, and video, the pair was holding at a key spot on the chart of 163.90. This was prior resistance in the ascending triangle formation, which then turned into support last week.

But the bounce from that support held a lower-high at 165.00, which was confluent with the 200-day moving average.

EUR/JPY Daily Chart

From the four-hour chart, EUR/JPY is already very close to a support level at 162.00, which is the 38.2% retracement of the August-October rally. That could make the pair a difficult venue to chase, but it does set the stage for a possible pullback and for that, there’s a couple of spots of interest for lower-high resistance potential.

The level at 163.21 sticks out as key as that price had come into the picture a couple of different times as support, including the prior low before the recent sell-off pushed down towards 162.00.

Above that, we have the level looked at yesterday at 163.90, and this is what sellers would need to hold price below to retain control of the near-term trend. And, more aggressively, if sellers can hold the 162.72-162.80 zone, then the prospect of bearish momentum continuing down for another test of the 162.00 level would look more attractive.

For next support, the currently monthly low plots 50 pips below that Fibonacci level at 161.50, after which another Fibonacci level from the same sequence comes into play at 160.5, followed by the 160.00 psychological level.

EUR/JPY Four-Hour Price Chart

--- written by James Stanley, Senior Strategist