EURJPY recently broke below support at the 133.50 minor psychological mark then dipped to a low of 131.50 before pulling back up. Applying the Fibonacci retracement tool on the latest swing high and low reveals that the 38.2% level lines up with the broken support, which might hold as resistance.
If so, price could drop back to the previous lows or even make new ones until the 130.00 major psychological level. The 100 SMA is crossing below the 200 SMA to confirm that the downtrend is set to carry on.
However, both stochastic and RSI are on the move up, which suggests the possibility of a larger correction. In that case, EURJPY could still pull up to the 50%-61.8% Fib levels, which might be enough to keep gains in check. A break above the highest Fib at the 134.50 mark might signal the start of an uptrend.
Event risks for this trade setup include the BOJ interest rate statement, as several analysts are expecting the central bank to announce additional easing measures. Economic data from Japan has been mostly disappointing, particularly when it comes to industrial production and consumer spending. Inflationary pressures have also been very weak, putting the country farther away from reaching its 2% inflation target.
More easing from the BOJ could spur a huge yen selloff and trigger a break of the Fib levels. On the other hand, words of reassurance could keep the yen supported as traders reduce expectations of additional bond purchases.
The ECB has already expressed its dovish bias in their rate statement during the previous week, putting the euro on a path of least resistance to the downside. Yesterday’s economic releases from the euro zone came in mixed, with Germany printing a better than expected preliminary CPI and showing a flat reading. Spain printed a 0.7% decline in price levels, worse than the projected 0.6% drop and keeping a lid on inflationary pressures in the region. German retail sales and euro zone CPI estimates are due today with another set of negative readings likely to spur more losses for the shared currency.