The euro currency is starting to look increasingly bullish against the Japanese yen, as the EURJPY trades at its highest level since April 2018 and appears to be preparing to move into price discovery above the 134.00 level.
A multi-year technical breakout took place this week when the EURJPY pair advanced above the 133.65 level. This meaningful upside move meant that the EURJPY now has limited technical resistance ahead until the 137.50 resistance zone.
Technical traders will be looking for continued gains above the 133.65 level as a major signal that the EURJPY pair is set to take-off towards the January 2018 trading high, around the 137.50 price area.
On the fundamental front the euro currency could benefit as lockdowns start to come to an end in Europe, and inflationary pressure starts to show up. Earlier this week German CPI inflation data showed a 0.5 percent monthly increase, while the year-on-year CPI print came in at 2.4 percent, which is well above the European Central Banks 2 percent target.
Should we see the ECB acting on inflationary pressure, and discussing raising rates, it would broadly benefit the euro currency on the foreign exchange market. This is one of the reasons why being short the EURJPY pair is a risk proposition at the moment.
Furthermore, retail sentiment data currently shows that there is a large one-way bearish skew towards the EURJPY pair right now. Traders are on the right side of the market as the pair starts to pullback after going to new highs recently.
The ActivTrader Market Sentiment tool shows that some 75 percent of traders are bearish towards the EURJPY pair right now, which bodes well for further strong upside gains. Historical data has shown that fading one-sentiment skews amongst the retail crowd has proved to be lucrative.
EURJPY Short-Term Technical Analysis
The four-hour time frame shows that a bearish rising wedge pattern has formed and is present between the 133.50 and 134.20 level. These wedge patterns are typically considered to be bearish reversal patterns.
Interestingly, if the pattern is invalidated then historical data shows that parabolic upside moves can occur. Therefore, if the EURJPY pair invalidates this pattern and breaks above the 134.20 level, then a huge breakout rally could commence.
EURJPY Medium-Term Technical Analysis
Looking at the daily time chart shows that the EURJPY pair has formed a huge, inverted head and shoulders pattern following the recent breakout above the 133.65 level.
If the pattern plays out to its full upside potential then a huge rally towards the 1.6000 level could happen over the medium to long-term horizon. In the near-term a rally towards the 137.50 level looks highly possible while the price trades above the 133.65 level.