EUR/JPY: How Low Can EUR Go?

About a month ago, we looked at the daily chart of the EUR/JPY in the immediate aftermath of the European Central Bank press conference – for details click HERE. As a reminder, ECB President Mario Draghi delivered a bearish assessment on the Eurozone economy, saying the downside risks had increased since the start of the year and that inflation outlook was significantly lower due to the impact of renewed oil price drop. As a result, he said, the ECB will review and may reconsider its monetary policy stance in March.

Although the EUR/JPY initially fell sharply on that day, it then embarked on a sharp rally on profit-taking and as traders looked forward to the Bank of Japan policy meeting. The BOJ of course cut interest rates into the negative and this led to further gains for the EUR/JPY as the yen weakened. However the rally then stalled at 132.30 as equities turned volatile once more, increasing the demand for the safe haven yen, and as question marks were raised over the BOJ’s latest easing measures. Meanwhile, the euro weakened as traders prepared for the prospects of more QE from the ECB in March.

So, the EUR/JPY has maintained its bearish momentum and further losses look likely. It is interesting to note that the most recent rally ended at the top of the bearish channel, with price holding below the main moving averages. As the EUR/JPY has also broken below the key support area between 126.15 and 126.90, the path of least resistance is clearly to the downside.

But the EUR/JPY does appear to be severely oversold now and may be due for a short-term pullback especially around the 122.00 area. Should we get there, I would expect to see some sort of a short-covering bounce due to the sheer number of Fibonacci levels that converge there. As can be seen from the chart, the 50% retracement level of the entire 2012-2014 rally meets the 127.2% extension level of the large upswing from the 2015 low and the 161.8% extension of the upswing from January around this pivotal 122 area. The next potential support below 122 is the psychologically-important 120 handle.

At this stage, the short-term technical outlook will only turn bullish upon a potential break back above the aforementioned 126.15-126.90 resistance range. But the longer-term outlook will remain bearish while the EUR/JPY is contained inside the bearish channel.