EUR/JPY drops to key support post ECB and ahead of BoJ

Following the conclusion of the ECB’s press conference earlier today, the euro gave up its entire gains before breaking down to head lower across the board. The breakdown of the euro coincided with the dollar extending its gains. As result, the EUR/USD dropped to 1.2100 from a post-ECB high of around 1.2210, before rebounding slightly. The Dollar Index correspondingly rose and closed in on resistance at 91.80. Thanks to positive company earnings results in the US, the major stock indices remained supported after yesterday’s rally, especially in Europe owing to the weakness in the euro. This provided a toxic mix for the safe-haven and buck-denominated gold and silver. While it was indeed a risk-on day, the risk-sensitive EUR/JPY failed to show any bullish signs due to the euro’s widespread weakness.

With the bank of Japan up next to make its own policy decision in the early hours of Friday, the EUR/JPY would thus remain in focus as we head into the last day of the week. This popular currency pair has shown technical signs of weakness today although you have to take that with a pinch of salt given the upcoming BoJ meeting. If the Japanese central bank is dovish and the yen weakens then the EUR/JPY may keep its bullish bias intact despite today’s weakness and given the positive tone in the stock markets today. However, the bigger move could actually be to the downside in the event the BoJ is surprisingly hawkish, or, otherwise, the yen strengthens on Friday.

That’s because the EUR/JPY has turned lower from the technically-important 1.3300-1.3350 area, which suggests that the bears may still be in control ever since the unit topped out in February. As can be seen on the chart, this 1.3300-1.3350 area was the previous low prior to the rally above the old high of 1.36.50ish which ultimately failed to hold, resulting in the formation of a false break reversal pattern. Once support, the 1.3300-1.3350 area has now turned into resistance. Not only that, we may have seen the formation of another false break reversal pattern here, as depicted on the chart.

Now, that being said, the pivotal area between 132.05 and 132.40 remains intact, at least for the time being. This area had been both support and resistance in the past. What’s more, the 200-day moving average also comes into play here. Thus, for the above reversal pattern to be confirmed, the bears will need price to break decisively below the low of this range at 132.05, for then we will have our first lower low. Indeed, if this level doesn’t break then the bullish bias for the EUR/JPY will remain intact. An eventual break above today’s high of 133.25 would render any bearish signals invalid, in any case.

So, in summary, the EUR/JPY has reached a pivotal area between 132.05 and 132.40 following the ECB rate decision and press conference, and ahead of the Bank of Japan’s policy meeting on Friday. Conservative traders may, therefore, wish to wait for the market to tip its hand and then look for trade setups in the direction of the break: bullish above 133.25 and bearish below 132.05.