EUR/JPY, GBP/JPY: Rate differentials matter, politics don’t

Rate differentials, not politics, are driving moves in EUR/JPY and GBP/JPY
Morning star patterns suggest potential turning points in both pairs

Overview

Considering some of the headlines coming out Europe, especially regarding French politics, you’d imagine Japanese yen crosses such as EUR/JPY and GBP/JPY would be getting slaughtered. But they’re not. That’s telling. Instead, political chaos in France should be treated as the norm rather than exception, leaving other factors to drive FX market movements.

As this note will discuss, in this instance, it’s relative longer-dated rate differentials with Japan that have been highly influential over the past month, providing a guide on what traders should be watching when assessing setups.

EUR/JPY delivers bottoming signal

Source: TradingView

Before looking at setups in EUR/JPY, take note of the rolling 20-day correlation it has seen with 10-year bond yield differentials between Germany and Japan in the bottom pane, sitting at an extremely strong 0.97. Where spreads have moved, EUR/JPY has almost always followed.

EUR/JPY has completed a three-candle morning star pattern on the daily timeframe, a signal often seen around market bottoms. Two failed bearish breaks of the uptrend established in early August bolsters the signal from the pattern. While the price action has become more constructive for bulls, momentum indicators such as RSI (14) and MACD are yet to confirm, continuing to generate bearish signals. As such, there is no need to force trades in this environment. Let the price action tell you how to procced.

EUR/JPY stalled above 158.58 on Wednesday, making that a near-term level of note. If the price were to push above this level again and hold there, it would present a potential bullish setup, allowing for longs to be established above with a stop beneath for protection. 160.32 is a minor level that acted as both support and resistance earlier this month, making that an initial trade target. Above, tougher tests await at 161.85 and the 50-day moving average.

Alternatively, if the price is unable to break and hold above 158.58, another setup would be to sell beneath with a stop above for protection. Potential targets include the uptrend located around 156.75 today or 156.25, the low set on Wednesday.

GBP/JPY: bearish momentum turning?

Source: TradingView

Like EUR/JPY, GBP/JPY has been strongly correlated with rate differentials between the UK and Japan over the past month on a daily timeframe, sitting at 0.96. There’s one checklist item to monitor when considering potential setups.

GBP/JPY has completed a three-candle morning star pattern, with the low struck on Tuesday coinciding with minor support at 188.10. If we have seen a near-term bottom, the first topside level of note is the uptrend established in early August. Prior to being broken earlier this month, the price bounced off this level on multiple occasions, suggesting it may now act as resistance.

Above, 193.61 and 50 and 200-day moving averages are located in close proximity, providing only limited runway for upside from a technical perspective. Even though RSI (14) has broken its downtrend, hinting momentum may be in the early stages of turning, MACD has yet to confirm the signal.

As for potential setups, a break and hold above the August uptrend would allow for longs to be established with a tight stop beneath entry level for protection. Targets as listed above. Alternatively, of the price is unable to break above the uptrend, the setup could be flipped with shorts established below with a tight stop above for protection. The obvious target would be 188.10 with 186 and 183.73 the next after that.

-- Written by David Scutt

Follow David on Twitter @scutty

How to trade with City Index

You can trade with City Index by following these four easy steps:

Open an account, or log in if you’re already a customer

• Open an account in the UK
• Open an account in Australia
• Open an account in Singapore
Search for the market you want to trade in our award-winning platform
Choose your position and size, and your stop and limit levels
Place the trade

From time to time, StoneX Financial Pty Ltd (“we”, “our”) website may contain links to other sites and/or resources provided by third parties. These links and/or resources are provided for your information only and we have no control over the contents of those materials, and in no way endorse their content. Any analysis, opinion, commentary or research-based material on our website is for information and educational purposes only and is not, in any circumstances, intended to be an offer, recommendation or solicitation to buy or sell. You should always seek independent advice as to your suitability to speculate in any related markets and your ability to assume the associated risks, if you are at all unsure. No representation or warranty is made, express or implied, that the materials on our website are complete or accurate. We are not under any obligation to update any such material.

As such, we (and/or our associated companies) will not be responsible or liable for any loss or damage incurred by you or any third party arising out of, or in connection with, any use of the information on our website (other than with regards to any duty or liability that we are unable to limit or exclude by law or under the applicable regulatory system) and any such liability is hereby expressly disclaimed.

City Index is a trading name of StoneX Financial Pty Ltd.

The material provided herein is general in nature and does not take into account your objectives, financial situation or needs.

While every care has been taken in preparing this material, we do not provide any representation or warranty (express or implied) with respect to its completeness or accuracy. This is not an invitation or an offer to invest nor is it a recommendation to buy or sell investments.

StoneX recommends you to seek independent financial and legal advice before making any financial investment decision. Trading CFDs and FX on margin carries a higher level of risk, and may not be suitable for all investors. The possibility exists that you could lose more than your initial investment further CFD investors do not own or have any rights to the underlying assets.

It is important you consider our Financial Services Guide and Product Disclosure Statement (PDS) available at www.cityindex.com/en-au/terms-and-policies/, before deciding to acquire or hold our products. As a part of our market risk management, we may take the opposite side of your trade. Our Target Market Determination (TMD) is also available at www.cityindex.com/en-au/terms-and-policies/.

StoneX Financial Pty Ltd, Suite 28.01, 264 George Street, Sydney, NSW 2000 (ACN 141 774 727, AFSL 345646) is the CFD issuer and our products are traded off exchange.