Euro Technical Outlook: EUR/USD, EUR/JPY Pullbacks

Euro Talking Points:

• The headlines out of Europe have been very negative but price action in the Euro hasn’t quite matched that tone of late.
• EUR/USD has continued to find bids to hold above the 1.0500 level and even EUR/JPY has put in a bounce following the fast sell-off that extended into this week.
• I look into both pairs each week during the Tuesday webinar, and you’re welcome to join the next:

While the headlines out of Europe haven’t been very positive price action in the single currency hasn’t been quite that negative. To be sure, the pair did have a very bearish two months to open Q4 but such as we saw last quarter, where the trend drove in a dominant fashion for the first two months, the third month has so far been an episode of mean reversion.

In EUR/USD, the big spot is the 1.0500 level. While this held support and brought a bounce in mid-November, sellers eventually sliced through later in the month, and there have even been tests below the big figure twice this week. But each time selling pressure has dried up and prices have come in to set higher-lows, illustrating a decreasing degree of aggression from bears upon tests below the 1.0500 level.

I had looked at this in the Tuesday webinar and as I said then, this keeps the door open for pullback potential. So far bears have been able to hold spot prices below the 1.0600 handle but that level becomes a logical next area to look for resistance, if higher-lows are able to hold.

EUR/USD Four-Hour Price Chart

Chart prepared by James Stanley, EUR/USD on Tradingview

EUR/USD Daily

From the daily we can get a better view of that recent stalling below the 1.0500 handle and there can even be a case made for a short-term ascending triangle formation. Resistance in that case would plot from around 1.0595-1.0611.

But – given the recent sell-off there’s also a lot of additional resistance potential overhead. There’s the 38.2% retracement of the recent sell-off plotted at 1.0670, and then the 1.0700 handle which had set support just after the election move had priced-in. Above that, the 50% mark of the recent sell-off which is confluent with a prior price action swing at 1.0774.

EUR/USD Daily Price Chart

Chart prepared by James Stanley, EUR/USD on Tradingview

EUR/JPY

EUR/JPY has similarly bounced over the past couple of days but I remain of the mind that it may be a more attractive venue for Euro-weakness setups. The pair put in an outsized move-lower that extended into the December open, with a fresh low setting on Tuesday morning. I had looked at the pair just before on Monday afternoon, highlighting a trendline that had started to hold the lows and ultimately that held a second test which has led into the two-day bounce.

Yesterday brought a test of resistance at the 158.04-158.24 zone but bulls have continued to push, with prices now testing resistance at the Fibonacci level of 159.10. From the four-hour chart below, there’s still no evidence that sellers are finished as we now have a shorter-term series of higher-highs and lows.

For next resistance, I’m looking to the 160.00 psychological level which functioned as both support and resistance when price was on the way down. And when I looked at the setup in the Tuesday webinar, I pointed out the highs at 160.34 as a level that I would like to see sellers defend in order to keep the door open to bearish trend continuation scenarios.

EUR/USD Four-Hour Price Chart

Chart prepared by James Stanley, EUR/JPY on Tradingview

EUR/JPY Weekly

While EUR/USD is near long-term lows around the 1.0500 handle, the weekly chart of EUR/JPY helps to explain why I think EUR/JPY may be a better venue for continued Euro-weakness.

The bounce showing so far this week comes in around the 50% mark of the 2023-2024 major move and the pair is still well-elevated on a longer-term basis. The fact that bears were able to push through 160.00 so decisively suggests that bearish continuation can remain as a major driver, but I think the big test will be whether they can defend that spot of resistance in the case of bounces continuing. The 38.2% retracement of the same major move that has brought a bounce at the 50%-mark plots at 160.90, which helps to create a longer-term zone of interest.

That sets the stage for a big test of the shorter-term series of higher-highs and lows looked at above can continue. But if looking for Euro strength I think the earlier setup in EUR/USD could be more attractive whereas EUR/JPY could carry more of a bearish lean until that zone above the 160.00 handle is traded through.

EUR/JPY Weekly Price Chart

Chart prepared by James Stanley, EUR/JPY on Tradingview

--- written by James Stanley, Senior Strategist