EUR/JPY Forecast: Inverted Head & Shoulder ends up in Head and Shoulder!

The EUR/JPY pair witnessed an inverted head and shoulder breakout on the daily chart on 2nd June, after which the cross jumped to 141.04 before the offers ensured the pair dropped to a low of 133.29 on July 8.

EUR suffers double whammy

The EUR/JPY and risk sentiment were known to move in tandem post 2008 crisis. However, off late the direct relationship between the two has turned sour. The EUR has been offered off-late during the bouts of risk aversion; which underscores the fact that the EUR is being increasingly used as a funding currency. This is quite evident from the move witnessed in the EUR/JPY pair since last month. 

The declining probability of Grexit, at least in the short run, has pushed the EUR/JPY pair lower. Apart from the funding currency rationale, the weakness also highlights the fact that declining fear of Grexit has pushed the US Fed one step closer to the much awaited interest rate hike. Consequently, the EUR suffered; a sort of double whammy. 

Thin economic calendar this week

The thin Euroloand economic calendar this week means the pair is at the mercy of US rate hike expectations and overall market sentiment. After Bundestag’s approval of Greek debt negotiations, the probability of Grexit has dropped even further. Consequently, the EUR could remain under pressure throughout the week. 

Another event that could turn bearish for the EUR is the BOE MPC minutes. Last week’s hawkish comments from Carney indicate there is a slight possibility that MPC may have begun telegraphing a rate hike a little more aggressively. Moreover, Carney expressly stated for the first time that rates could rise at the turn of this year. Thus minutes may show a vote or two to have shifted in favour of a lift-off in the last meeting. In such case, the EUR/GBP is likely to be sold aggressively, thereby weighing over the EUR/USD spot. 

EUR/JPY – Eyes Head & Shoulder neckline at 133.35

1. The daily chart clearly shows an inverted head & shoulder breakout eventually ending up in a normal head & shoulder. 

2. The sharp bounce from the low of 133.29 ran into offers at 137.79 (July 13 high). The pair also failed to sustain above the 50-DMA, which was followed by a sell-off last week. 

3. At the moment, the pair is up 0.39% at 134.88. The gains could be extended to 135.26 (hourly 200-MA), although gains could be capped around the same as the daily RSI is well below 50.00 line. 

4. The failure to take out 135.26 on the closing basis could be followed by a sell-off to 133.35. A daily close below the same opens doors for 131.74 (March 18 high).