Could EUR/JPY break lower along with stocks?

Mirroring the going stock market indecisiveness, the risk-sensitive euro/Japanese yen (EUR/JPY) currency pair is currently stuck below a key technical area around 129.50. We are waiting to see if it will start to break down with some follow through now, or whether the buyers will come back and regain control. Furthermore, gold’s sizeable rally on Tuesday may also be indicative of investors growing increasingly risk-averse.

Taking into account price action since the start of February, which is when we also saw a big breakdown in global stock indices, the technical outlook looks overall bearish. For one, we have a number of lower lows and lower highs in place. For another, price is currently holding below both the 50- and 200-day moving averages. What’s more, these moving averages are also now pointing lower, objectively telling us that the trend is bearish.

However, the big kick-back rally from around the 125.00 handle makes us wonder whether a low has already been formed. But so far, the key resistances have been respected and we haven’t had a break in market structure of lower highs. 

Thus, all told, the trend is indeed bearish. So, can now see the resumption of that downward trend?

Well, as can be seen on the chart, the EUR/JPY’s kick-back rally has come to a halt, at least for the time being, after the sellers stepped in right at the key 129.50 resistance level. As well as a prior support, this level also corresponds with the bearish trend line and the 38.2% Fibonacci retracement level. It is, therefore, a big level and so long as price remains below it, the path of least resistance would be to the downside. However, if rates were to break this 129.50 level and hold above it then we could see a resulting sharp rally.

If 129.50 holds as resistance and short-term support at 128.50 – which was being tested at the time of this writing – breaks down, then the next logical bearish objective would be to target the liquidity that would be resting below the most recent low at 127.15, followed by the next pool of liquidity underneath the subsequent low at 124.60.

Conversely, if 129.50 resistance breaks, then the bulls would aim for the liquidity pool above the most recent high at 130.35. Subsequent resistance, or potential resistance, comes in around the 132.00 handle which corresponds with the 200-day average and was a previous inflection point.