EURJPY Blasts through Key 146.70 Resistance, Bulls Eyeing 149.00 Next

As my colleague Kathleen Brooks highlighted earlier today, Japan’s economy has had a wild first 48 hours of the trading week. An abysmal Q3 GDP report, PM Shinzo Abe has pushed back next year’s planned sales tax hike and called for snap elections to take place in less a month to consolidate his political power.

While the yen hasn’t seen an immediate reaction to the recent political and economic turmoil, this week’s decisions will have a long-term effect on the Japan’s economy and currency. The decision to push back the sales tax hike will decrease inflationary pressures over the next year, though it will prevent the tax from kicking away the crutch of the already-hobbling Japanese economy. It could also force the BOJ to continue its extraordinary stimulus for longer than previously expected, adding a long-term headwind to the yen’s value. With a suddenly highly-anticipated BOJ meeting scheduled to take place tonight, yen traders on certainly on edge.

Techncial View: EURJPY

While USDJPY continues to consolidate below the 117.00 level, EURJPY has seen a major breakout above resistance at 145.60-70. This level represents the convergence of the pair’s previous 6-year high and the 161.8% Fibonacci extension of the September-October drop. Now that rates have broken through this key barrier, there is minimal overhead supply; essentially, any trader that has bought and held EURJPY at any point in the last six years is looking at an unrealized profit and has little incentive to sell for now.

Meanwhile, the price action and secondary indicators are showing about what you’d expect. Today’s big rally is creating an (unfinished) Bullish Marubozu Candle* on the daily chart, showing strong buying pressure and a potential bullish continuation heading into the middle of the week. Momentum is strongly bullish, as shown by the MACD trending higher above its signal line and the “0” level. Of course, the RSI indicator is now deeply overbought, but until EURJPY hits a resistance level, further gains will be favored.

On that note, the next major level of resistance is not until the 127.2% Fibonacci extension of the Dec. 2013 – Oct. 2014 high at 148.85. Of course, there’s no guarantee that EURJPY will necessarily rally the 200 pips needed to reach that level, but as long as rates remain above previous-resistance-turned-support in the 145.60-70 zone, the path of least resistance will remainto the topside.

* A Marubozu candle is formed when prices open very near to one extreme of the candle and close very near the other extreme. Marubozu candles represent strong momentum in a given direction.

Source: FOREX.com