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EUR/JPY: on the verge of a BIG break out?

After rising for five straight days, the euro’s good run of form could potentially be coming to an end against the yen… or about to get even better. That’s because the EUR/JPY is currently testing a major resistance level around 138.00. Depending on what happens here, this pair could stage a significant move in one or the direction over the coming days and weeks which should provide plenty of trading opportunities.

As can be seen from the chart, the last significant rally ended against the 61.8% Fibonacci retracement level of the downswing from the December high, around 140.70/141.00 (we pointed out the possibility for a sharp drop from there – see “EUR/JPY: channelling focus on 138” for more). From there, price went on to break below the 138 handle with a massive gap. It came back to fill that gap before heading lower once more (for details see: “EUR/JPY: Mind the gap”). Price eventually bottomed out around its 100-day moving average support, then at 133.30, in early July.

Since then the EUR/JPY has been more stable as the bulls and bears tried to consolidate their positions, but neither party have been able to win full control. Over the past five days however, the bulls have had the upper hand as they pushed the pair up from a base of 135.00 to a high so far of 138.35, thus gaining 335 pips of 2.5 per cent. Consequently, price has rallied back to 138.00. But here, the EUR/JPY is now testing another 61.8% Fibonacci retracement level, this time of the downswing from the June high. If the previous 61.8% Fibonacci level is anything to go by then price could head significantly lower from here.  Considering the fact that this level was previously support and resistance and that there is also a bearish trend line converging around here, the case for another significant move lower is strong. But one cannot ignore the recent bullish breakout above interim resistance at 137.30. Thus there is also a case for price to continue in its upward trajectory towards at least 140.00.

Overall though, the risks are skewed to the downside for this pair and if 137.30 breaks down then we may witness another big sell-off. But in any case, speculators should let price action guide their trading decision and trade in the direction of the breakout.

Figure 1:

Source: FOREX.com.


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