EUR/JPY outlook turning increasing bearish: Drop to 155 likely

The EUR/JPY is among a growing number of yen pairs looking increasingly bearish. Not only is the euro a currency that has been struggling for various reasons, but the Japanese yen has been finding love of late, with investors growing a little risk averse in Europe and Asia, and the odds of a rate hike from the Bank of Japan being on the rise. The EUR/JPY outlook is increasingly tuning bearish, but it must continue holding below the 160.00 handle to keep the bears happy. I reckon the pair is heading down to 155.00 in the coming days.

Before discussing the macro influences further, let’s first discuss the EUR/JPY’s technical standing.

Technical EUR/JPY outlook: Key factors and levels to watch

The chart of the EUR/JPY pair is looking increasing bearish.

Source: TradingView.com

The EUR/JPY finished higher last month, ended a 3-month losing streak. But the selling has resumed, and the pair is on the verge of giving back the entire gains made in October. The reversal started back in July when it surged to above 175.00 handle, before a combination of FX intervention from the Japanese authorities and weakness in euro combined to push rates back down sharply. Once it moved back below the 2008 high of just below the 170.00 handle, it has faced strong resistance every time it has attempted to rally. More recently, the EUR/JPY attempted to break away from its 200-day moving average in October. But that attempt proved futile and the EUR/JPY went back below it by early November, before several stabs back at the 200-day average from underneath failed to crack that resistance. In other words, the next psychologically important handle of 165.00 turned into resistance.

Consequently, we have seen a sharp sell-off in the last few weeks and now the EUR/JPY finds itself testing the 160.00 level, another psychologically important barrier. A daily close below this level would tip the balance in the bears favour more decisively.

In terms of the key levels to watch in the event we see the EUR/JPY break decisively below 160.00, 158.10 is the first downside target, which was a low made in late September before the last significant rally took place.

If the EUR/JPY gets to 158.10, then why not fall even lower, for then it will have created a lower low? The September low itself was made at 155.15, while the August low was formed at 154.41, both around the next psychologically important level of 155.00. These levels could be the next bearish targets.

Therefore, a daily close below 160.00 could pave the way for a potential drop to 155.00 next.

What about resistance levels? Well, the most recent broken support area comes in around 160.90 to 162.00. This area is shaded in orange on the chart, and it will be the first major hurdle for the bulls to overcome. Above this, the bearish trend line established since rates peaked in July, comes in around 163.00, depending on how fast or otherwise we see rebound (if at all).

All told, I am leaning more towards the bearish side of things on the technical EUR/JPY outlook than bullish, not only because of what the chart is telling us but also because of bearish macro factors in play right now. Speaking of…

EUR/JPY outlook: Yen underpinned by weakness in European, Japanese stocks

The yen is a haven currency, and it tends to perform well when stocks signal risk off. That has been the case today, with European indices nursing losses of around 0.5 to 1.4 percent, and Nikkei futures being off around 1%, holding below its 200-day moving average. Wall Street also struggled followed the release of mostly positive data, although with the S&P 500 only yesterday hitting a record high, the weakness post open can be attributed mostly to profit-taking with Thanksgiving holiday looming. In Europe, sentiment has been hurt because of concerns about US tariffs in 2025, as well as data pointing to a struggling Eurozone economy and, not to mention, political turmoil in France and Germany all contributing to a negative backdrop. Underscoring these worries, the CAC was down by more than 5% year-to-date, even after four months since the French snap elections. The Eurozone’s second largest economy thus remains in a political turmoil, and Prime Minister Michel Barnier has warned that financial markets could face a “storm” if lawmakers reject the government’s budget proposals.

Meanwhile, Germany is dealing with its own political turmoil where a snap election is going to take place on February 23, while threats of US tariffs make for a less-than-ideal scenario for German automakers and exports. On top of this, you have consistent weakness in US data, which the latest sentiment data showing consumer and business sentiment have both turned more pessimistic.

Against this bearish macro backdrop, I would expect to see further weakness in the euro, and the EUR/JPY outlook therefore doesn’t look too bullish.

Yen rises on weakening global yields and rising bets of BoJ rate hike

Meanwhile, the Japanese yen has been on the ascendency, in part because of the recent downtick in global bond yields. In contrast, Japanese yields have been holding steady amid growing speculation about a rate hike from the Bank of Japan next month.

The yen has also been coming back following last week’s comments from the Bank of Japan Governor. Mr Kazuo Ueda said the domestic economy was progressing towards sustained wages-driven inflation, suggesting a tighter policy was warranted. Indeed, he warned against keeping rates too low for too long. This has led to market talk that another interest rate hike, possibly as early as next month, is back on the table.

With the increased possibility of a rate hike by the BoJ, combined with a greater chance for an outsized rate cut by the ECB, the yield spready between Eurozone bonds and those of Japan are narrowing, removing a major source of support underpinning the EUR/JPY outlook all this time.

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R

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