The Japanese yen is making victims across the FX dashboard, as reflected by the sharp drop in the EUR/JPY exchange rate. The cross pair made a double top pattern at 133, and since then it dropped over 500 pips points.
2021 has brought a rally in the Japanese yen pairs. Because the US stock markets rallied, investors sold the Japanese yen across the board.
The rally was most visible on the USD/JPY pair – it jumped from the 102 area to over 115. However, other cross pairs, such as the EUR/JPY seen below, have outperformed.
Yet, in the case of the EUR/JPY exchange rate, it met stiff resistance at the 133 area. It formed what looks like a double top pattern, and the recent five-hundred pips drop from the last weeks puts more pressure on the downside.
Horizontal support holds for now
This is not the first time when the market has reacted to horizontal support in the 128 area. In fact, this is the area from where the market bounced in the late summer months before threatening to make a new high for the year.
Therefore, a decisive close below 128 would put more pressure on the market as the double top pattern becomes more evident. The neckline’s breach should trigger more weakness as the pattern’s measured move suggests a drop to 123 and below.
Rising inflation does not help
Tomorrow we will get euro area cor HICP data and there are upside risks to consensus expectations. Today, we’ve seen that the Spanish and German inflation keeps rising, so tomorrow’s 2.3% consensus may be easily surpassed.
Yet, the ECB does not plan to do anything. As suggested by Isabel Schnabel today, an executive board member of the ECB, inflation is still seen as temporary.
As such, the ECB is in no hurry to raise rates anytime soon, making it difficult to buy the common currency on a dip. Therefore, the fundamental picture completes the technical one, and further EUR/JPY weakness is to be expected.
If we add to this the possibility for investors to book some profits as the end of the trading year approaches, then it is even more difficult to envision a bounce from the current levels.