EUR/JPY has had a modest pullback after the late June rally stalled at 117.80 resistance. The range traders should be encouraged by this with the base of the recent trading range down at 113.50/114.09 (200-DMA) compared to current levels around 116.96, which is pretty close to a three to one risk reward ratio for a short. While there aren’t any particularly compelling sell signals popping up on our daily indicators yet the hourly charts do hint at downside pressure.
On the fundamental side the Japanese are obviously keen to see a weaker but JPY intervention prospects look rather slim currently. We’d probably need to see USD/JPY to make a decent run through 80.00 to prompt further BoJ buying. Equity gains are probably the greater risk for EUR/JPY bears, keeping pressure on the principle funding currencies (JPY/USD/GBP) where the policy stances are markedly divergent from the ECB’s. While we’re bullish equities on a multi week time frame after the strong gains of last week some consolidation wouldn’t be surprising which in turn would allow the EUR to drift lower in the short-term. Eurozone debt problems are rarely off the front pages too, underlined by this evening’s decision to cut Portugal’s debt rating to junk (Ba2) which ought to counter another (probable) ECB rate hike on Thursday.
Against this backdrop any run back towards EUR/JPY117.20 should be viewed opportunistically, working a stop on a close above 117.80. Shorts should add if 115.80/90 falls with a 114.30 target.
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