EUR/JPY: 128.40 a key Reversal point?

EUR/JPY bashing continued during the European session, as the euro was relentlessly sold-off across the board, being the worst performer so far in the currency markets. However, the cross seems to have found a bottom around 128.40 levels and bounced off that level, inching back towards 129 handle, levels seen pre-FOMC. The losses in EUR/JPY seem to be cushioned by a broadly weaker Japanese yen as well. EUR/JPY currently trades at 128.97 levels, -1.23% lower on the day, retracing from day’s low at 128.45 levels.

The cross is expected to bounce-back from current level and retest 131 levels by Friday due to the following reasons:

• Fall in the Euro seems excessive:

  EUR/JPY kept losses all through the European session on the back of a massive sell-off seen in the shared currency on profit-taking after the euro jumped nearly 500 pips on the dovish FOMC Statement to fresh three week lows versus the greenback. The euro managed to erase all gains and now stands at levels below 1.07 seen before FOMC event. Also, traders now view that the sell-off in euro is seemingly over done and that the shared currency should resume its recovery mode from 2003 lows seen last Friday.

• Upbeat Euro zone data continue to underpin euro:

  The cross may further receive support from the recent cheerful Euro zone consumer sentiment and price pressures prints. The CPI in the 19-nation bloc was 0.3% lower than a year earlier in February - a considerable improvement when compared with the 0.6% slide seen in January. The ZEW Economic Sentiment Index rose to 54.8 in March, up from February when the reading stood at 53 points. The encouraging set of EZ datas continue to boost the shared currency, highlighting the positive impact of the recent ECB QE commencement.

• Traders moved past Greece woes and QE:

  The shared currency may also garner support ahead as the traders seemed to have overcome looming Greece concerns and the ECB QE implications. Last Friday’s fall in the euro to fresh twelve year low below 1.05 barrier markets seemed to be completely absorbed by the markets and they look forward for a corrective rally back towards 1.10 handle. Also, the weakness in the euro on the back of divergent monetary policy outlook between the US and Europe may heal for now after the FOMC statement read more dovish, stating a rate hike unlikely in the next meeting.

• USD/JPY likely to regain 121 and beyond:

  The US dollar is likely to outperform the yen on a generalized strength in the greenback and also as the US treasury yields rebounds from the FOMC induced slump. The yields on the 2-year treasury yields has sharply rebounded from fresh six week lows of 0.532% and now trades at 0.585%, recording a gain of 3.50% on the day. While that on the 10-yr note trades almost flat at 1.953%, bouncing in an attempt to regain 2%. Hence, the weakness in the yen is expected to add to the upside in EUR/JPY.

Technically, EUR/JPY seems to have bounced-off of a key support at hourly 100-MA located at 128.42 levels, forming a key reversal point, and has regained 129 handle. The EUR/JPY cross is expected to hold the 129 barrier and beyond that doors are likely to open for a retest of 131 levels. However, if the pair falls from the 129 barrier and breaches the crucial support at 128.40 levels, further losses are expected till next support at 128. A fresh sell-off may trigger below a break of 128 handle, which may drown the pair to test 126 levels.