EUR/JPY: The pair to watch as US goes on holiday

Today it has been all about the dollar as three days’ worth of US macroeconomic pointers were published in the space of just a few hours to avoid conflicts with Thursday’s Thanksgiving holiday. The US data dump led to a volatile afternoon session for the major currency pairs denominated in the buck. With the US data out of the way now, speculators may wish to consider some currency crosses instead, for example the EUR/JPY. This pair’s BOJ-inspired rally has faded a little, but further gains could nonetheless follow soon depending on what price does around key technical levels and obviously the upcoming fundamental events. This morning, the European Central Bank Vice President Vitor Constancio said that the ECB may be able to find out in the first quarter of 2014 whether it will need to start buying sovereign bonds in order to help stimulate the euro zone economy and fight off deflation threats. Until then, the oversold euro may therefore stabilise a little bit or extend its falls only moderately against currencies where the central bank is becoming less dovish, for example the US dollar. As the Bank of Japan currently holds a very loose monetary policy stance, the euro’s potential gains in the near term could be amplified against the yen in particular. That’s unless of course the Eurozone data deteriorates further in the interim.

In the very short-term outlook, there EUR/JPY could find direction from this week’s data releases from both the Eurozone and Japan. Tomorrow, we will have some important data from Germany, which include the latest unemployment figures and the preliminary CPI estimate. The latter will be very important as it would give a good indication about what to expect for the Eurozone inflation data that will be released on Friday. The German CPI is expected to be flat month-over-month after falling 0.3% in October, while the Eurozone equivalent is seen rising 0.3% in November following a 0.4% increase the previous month. Also on Friday we will have the Eurozone unemployment rate, expected to have remained unchanged at 11.5% in October, as well as the latest German retail sales and French consumer spending figures. Meanwhile a raft of Japanese data will be published in the early Asian session on Friday. These include household spending, retail sales, housing starts, industrial production and Tokyo core CPI.

Technical view

As can be seen from the chart, the EUR/JPY peaked at just above 149.00 last week when it also failed to hold above 148.80 – the 127.2% Fibonacci extension level of the downswing from the 2013 peak. The resulting correction pushed the cross down towards that 2013 high of 145.67. Whereas this level had formerly been resistance, this time it turned into strong support. The reaction from that level alone provided the bulls in excess of 150 pips on Monday to take advantage of.

Meanwhile the 2013 high also roughly corresponds with the shallow 23.6% Fibonacci retracement of the up move from October, at just ahead of 145.55. Therefore, the area between 145.55 and 145.70 is a key support region. Thus a break below here could pave the way for a more profound correction. The next logical support is the 38.2% retracement at 143.40, a level which was also previously resistance. On the upside, traders should watch Monday’s high of 147.38/40 closely, for if this level breaks, the EUR/JPY could go on to test last week’s high at the very least. But there’s also a good chance for price to continue pushing higher. In that case, traders should watch the psychological 150.00 level for some resistance. Above 150.00, the bulls may target the 161.8% extension at 152.80.