Technical Sentiment: Bearish

Key Takeaways

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A sluggish Yen allowed EUR/JPY to correct higher thus far in August;

Most recent Lower High, priced at 138, kept buyers in check;

Tensions in Ukraine triggered a moderate sell-off during the European session;

Traders are waiting for ECB President Draghi’s Speech later on Friday;

Despite increasing weakness in the Euro zone economy, EUR/JPY was able to retrace its steps all the way up to August high.

Technical Analysis

With geopolitical tensions high and a critical resistance level ahead, EUR/JPY bears are forced to escalate selling pressure if they want to see the downtrend – with its configuration of lower swing highs – survive to see another week.

EUR/JPY is currently trading around 137.70 ahead of the US session. The pair sold-off after bouncing off 138.00, dipped as low as 137.30 (200 SMA support on 4H chart) and exhausted the average daily range. Unless Draghi will manage to move the market out of its comfort zone, we expect EUR/JPY to maintain the current boundaries between 137.30 and 138.00. That being said, the daily close should provide strong clues for early next week.

A Bearish Engulfing bar will form if the Daily Close ends below 137.45, a strong indication for the beginning of a bearish wave starting next week. Stochastic is showing overbought conditions on both 4H and Daily, strengthening the scenario that a top is forming in this area. Furthermore, the pair will also be rejecting off the 50-Day Simple Moving Average. Immediate support lies at 136.70/80, yet a sell-off is likely to extend directly to 136.00 and even lower.

If EUR/JPY ends the day above 137.45/65, then buyers are unlikely to lose traction and a continuation higher will be in play. A rally above 138.00 should lead directly to 138.90, old pivot zone and 100-Day SMA line. Bullish potential extends as high as 139.80-140.00 in the medium term; however a retracement will be necessary on the way up.