EUR/JPY Forecast: Poised to test 140.50 levels

EUR/JPY sits near fresh five month highs reached at 138.86 on Tuesday and extends its 5-day rally, bouncing-off strong support at 133 levels seen during the last week. The pair has risen more than 500 pips over past one week and is likely to prolong its winning streak to 140 barrier and beyond. The cross sustained gains largely on the back of persistent yen weakness, although the recent 280 pips jump was solely due to strengthening shared currency across the board. The euro jolted higher on Tuesday mainly on renewed optimism about a Greece solution. While better than expected Euro zone CPI print which revealed that 19-Nation bloc returned to the inflation arena also boosted EUR bulls.

At the moment, the EUR/JPY cross trades flat at 138.38 levels awaiting fresh cues from the upcoming US macro data releases for further USD moves. However, the main market mover defining the further direction for the cross is expected to be US Non-farm payrolls data due to be published on Friday. Hence, prior to NFP release, we anticipate EUR/JPY to continue its bullish momentum reaching levels not seen since January 2015.

Technically, on the daily chart, EUR/JPY gave an inverted head and shoulders bullish break out on Tuesday and remains supported well above 138 barrier. The cross also pierced through the 200-DMA located at 137 levels and spiked nearly 200 pips thereon. At the moment, EUR/JPY trades above all the major moving averages with the daily RSI hovering around 72 in the overbought zone. Hence, moving averages and technical indicator point to further upside in the making with the pair expected to test 140.50 levels ahead of Friday’s NFP figures from the US. A break above the last, EUR/JPY may rally to 142.70 levels. However, 200-DMA resistance-turned support and the inverted head and shoulders neckline at 137 levels will acts as a crucial support below which the short term bullish momentum wanes.

Fundamentally, the US dollar remains strongly bid across the board, rebounding sharply from fresh weekly lows reached today at 95.69. The greenback brought an end to its corrective slide and edged higher largely as the USD bulls jumped back into bids ahead of key US macro releases due later this week.

Later today, the US dollar is expected to receive additional impetus from upbeat trade and ADP employment change data from the US. With regards that US trade data, the market is expecting the reversal of the massive March spike in the deficit. Markets have predicted a $44.2 billion shortfall for April. Also, ADP non-farm employment change, the forerunner ahead of Friday's non-farm payrolls, is expected to reveal a figure of 200,000 for the month of May, after 169,000 in April.

Looking ahead, markets await more US economic data to come to assess the health of the US economy and try to discern when the Federal Reserve (Fed) will start to raise its rates. The Friday jobs figure is likely to be the most anticipated macro news that may show that the US economy created 227,000 new positions in May, following April's 223,000, with the jobless rate staying unchanged at 5.4%.

Hence, broad based US dollar strength is expected to extend for the rest of week dragging the Japanese yen to fresh thirteen year lows above 125 handle. The shared currency may also get negatively affected by generalized USD strength, albeit with lesser impact than that seen on the Japanese currency.

To conclude:

• EUR/JPY has displayed an inverted head and shoulders bullish break out on daily charts above 137

• Hence, the upbeat momentum is likely to extend to 140.50 levels ahead of Friday US payrolls data

• 200-DMA resistance-turned support and the inverted head and shoulders neckline at 137 levels to act as a key support, below which the near term uptrend may negate