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EUR/JPY Coiling for a Breakout?

In an otherwise quiet news day, the emerging theory that Europe’s economy may be stabilizing got some support from the updated Eurozone PMI reports.

As for Germany, the Eurozone’s most important economy, the final Services PMI report for October was revised up to 51.6, with the equivalent report for the Eurozone as a whole rising to 52.2. These readings are notably lower than the mid-50s readings we were seeing earlier this year, but they remain in positive territory. Separately, Germany reported 1.3% m/m growth in Factory Orders, well above the 0.1% reading expected, suggesting that the beaten-down manufacturing sector of the economy may be stabilizing as well.

While this morning’s reports are potential “green shoots” for the Eurozone economy, they’re second-tier releases/revisions. Traders will be looking for continued improvements in economic data as we head into next week, with Germany’s ZEW Survey (Tuesday) and Preliminary GDP reading (Thursday) on tap.

As it stands, the euro is generally shrugging off this morning’s reports. Keying in on EUR/JPY, rates have spent the last three weeks consolidating in a tight 100-pip range between previous resistance at 121.40 and support down at 120.40:

 

Source: TradingView, City Index

The tight consolidation following a strong rally through mid-October is a constructive development, giving the pair time to work off its excessive bullish sentiment, but it’s worth noting that the pair remains within a longer-term downtrend since peaking above 137.00 back in early 2018.

Given the conflicting short- and long-term trends, the eventual breakout from the current 100-pip range will be key to determining the near-term bias for EUR/JPY. A confirmed break above 121.40 resistance (especially if supported by continued improvement in Eurozone economic data) would open the door for a move up toward 123.00 next, whereas a bearish breakdown through 120.40 support could lead to an unwind of the October rally and a retracement back toward 119.00 or lower next.


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