EURJPY has been trending lower for the past few weeks but it looks like bears are tired from the selloff. A double bottom pattern has formed on the 4-hour time frame, as price was unable to break below the 122.00 level on its second attempt.
EURJPY has yet to test the neckline of the formation around 128.00 before confirming a potential reversal. The chart pattern is approximately 600 pips tall so the resulting breakout could be of the same size. However, the 100 SMA is still below the 200 SMA on this time frame so the path of least resistance might be to the downside.
In that case, another test of the 122.00 level could take place. Stochastic is indicating overbought conditions after all while RSI is already turning lower, reflecting a return in selling pressure.
Catalysts for this trade include the BOJ statement on Thursday. Traders are speculating that the Japanese central bank might introduce fresh stimulus measures to help the economy recover after the earthquakes. Also, their previous efforts such as cutting deposit rates to negative levels and jawboning the yen didn’t seem to produce much effect so far.
As for the euro, the region’s PMI readings released last Friday came in mixed, but there were a few notable upside surprises. The ECB refrained from easing monetary policy again in last week’s statement but cited that they won’t hesitate to use their tools if necessary.
The German Ifo business climate index is due today and a rise from 106.7 to 107.1 is eyed, likely giving the pair a boost up to the double bottom neckline. Other event risks for the week include euro zone CPI estimates and Japan’s retail sales and industrial production data.
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