EUR/JPY Prods the Neckline of a Mammoth Bearish Reversal Pattern

View related analysis:

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• Bullish-yen bets surge at record pace, USD outflows continue: COT report

In late December, I outlined my case for why EUR/JPY was my preferred short for 2025. From a high level, it continues to make sense. The Bank of Japan is veering towards further hikes to support the Japanese yen, alongside the risk-off flows that the Trump administration seemed destined to bring. Growth in Europe remains weak, and relations between its leaders and the Trump administration are frosty. And then there’s the issue of tariffs, and Trump strong-arming Europe into higher military spending in hopes NATO remains in place.

While I remain bearish on EUR/JPY, I cannot say with conviction that it will be the best short against the Japanese yen this year. Perhaps that will go to the Canadian dollar, which could be staring down the barrel of a recession with tariffs on the cusp of being implemented, despite upping their spending on border security at Trump’s request.

Still, price action clues very much remain bearish for EUR/JPY, a pair which appears on the brink of another leg lower.

EUR/JPY technical analysis

Prices are hugging the YTD low and in a very tight range this week. Prices are also just above holding above the neckline of a 1.5-year head and shoulders top, a bearish reversal pattern which suggests a downside target of 1.35 if successful. If that sounds far-fetched, it is only a -17% dop from this year’s high, and EUR/JPY managed annual ranges of ~18% in 2022 and 2023.

A break of the neckline could open up an initial run to 152, near a long-term 38.2% Fibonacci ratio. Though note that a 61.8% Fibonacci projection lands around 153.7. The 150 handle and 2015 high at 149.78 also seems like a likely support level along the way, alongside Fibonacci clusters around 145 and

137.50.

The one thing I do not like is the bullish divergence which is forming on the weekly RSI (14). But as it is not in the oversold zone, it likely warns of a potential shakeout along the way as opposed to a strong bullish reversal at this stage. And that makes EUR/JPY a pair for bears to consider fading into rallies this year.

EUR/JPY exposure from the COT report

Market positioning on the futures market also points to a lower EUR/JPY. Instead of using the low-volumed EUR/JPY futures contract, I am simply looking at the spread between EUR/USD and JPY/USD exposure of asset managers and large speculators.

From this angle, my proxy EUR/JPY futures indicator shows that large speculators reached their highest level of net-short exposure in nine year two weeks ago, and asset managers reduced their net-long exposure to their least bullish level in six years the week prior.

It is almost as if they’re waiting for a 1.5-year bearish reversal pattern to spring into action.

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge

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