EUR/JPY Breakout Higher

By Russell Glaser

The EUR/JPY is supported by improving fundamentals and positive technicals.

Looking first at the euro, recent euro strength can be explained via expectations of rising interest rates. ECB President Jean-Claude Trichet has made no secret of this and on Monday reiterated his commitment to increasing European interest rates. Rising inflation in the euro zone is consistently above the ECB target of 2% and Trichet appears determined not to let inflationary pressures get out of control. Expectations of the ECB raising the interest rate off of its 1.00% low have traders moving into the euro in search of higher yields.

The 17-nation currency is not without its faults. In the last meeting of Europe’s finance ministers, the group was unable to come to a decisive agreement to support the indebted peripheral nations with the new European Stability Mechanism. Yesterday S&P downgrading Greek sovereign debt as the rating agency expects a higher risk of a debt restructuring. However, the euro was little changed following the news. This sends a signal to traders; as the currency fails to react to negative news; underlying fundamentals have changed and the market is now focused on interest rate differentials

Turning to the yen, the Japanese currency is now trading at its weakest point since the G7 intervened in the FX markets. It appears traders have been positioned out of long yen positions by the unilateral intervention. Also improved risk sentiment is helping as traders unwind risk-off trades from the previous two weeks which supports a weaker yen.

Looking to the charts, the EUR/JPY appears to be reversing the long term trend. In mid-February the pair broke above the trend line off of the October 2009 high. The daily chart shows the long term moving averages have turned higher. Yesterday the pair broke out about above the previous resistance level on the weekly chart at 116.00. There is a lack of resistance levels on the chart until 119.60. Moving higher, the next resistance is found at 128.00 and 134.40. To the downside, support is found at 112.00 and the pre-intervention low at 106.80.


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