EUR/JPY bears gunning for Fibonacci support sub-130

<p>Markets are mostly – wait for it – quiet in between-holiday trade as the sun rises on another trading day in North America. As my […]</p>

Markets are mostly – wait for it – quiet in between-holiday trade as the sun rises on another trading day in North America. As my colleague Fawad Razaqzada noted earlier today, equities are trading higher across the board as are most commodities, while the US dollar is generally steady.

Continuing our trend of taking a slightly longer-term look at major currency pairs ahead of 2016, we wanted to put EUR/JPY under the microscope next. Not surprisingly, the single currency has been generally weakening against its Japanese rival over the last six months. Over this period, the European Central Bank has been more aggressive in easing monetary policy than the Bank of Japan, notwithstanding Draghi’s half-hearted measures early this month and the BOJ’s tweak to its QE program.

It’s difficult to see either of these central banks actively tightening monetary policy in 2016 as the European and Japanese economies continue to struggle with deflation, so the relative pace of easing in the coming year will be a major driver for EUR/JPY. If the current “green shoots” of an economic pickup in the Eurozone continue to blossom, the ECB may be able to hold off from additional easing, which would support the euro relative to the market’s depressed expectations.

On the other hand, if the Japanese PM Shinzo Abe’s Three Arrows finally jumpstart Japan’s economy and price pressures, EUR/JPY may continue to fade next year. Based on the recent history, we’re skeptical either of these optimistic scenarios will come to pass, but given the nascent signs of renewed growth in the Eurozone, Europe’s economy may be in a better place than Japan’s to start the year.

Technical view: EUR/JPY

Turning our attention to the chart, EUR/JPY is currently trading in the middle of its six-month bearish channel, so the sellers still are in control in the medium-term. The secondary indicators confirm this bearish view, with the MACD holding consistently in negative territory, while the RSI struggles to reach “overbought” territory, even on the counter-trend bounces.

A short-term bounce toward the top of the range near 134.00 is certainly possible given the illiquid trading conditions, but as long as rates remain below that barrier, more downside will be favored heading into January. The next major support level to watch will be psychologically-significant 130.00 level, followed by the 78.6% Fibonacci retracement at 129.30.

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