EUR/JPY: price forecast after failing twice at 133

A double-top pattern suggests more weakness is ahead. A clear move below the neckline of the pattern suggests more downside. The 130 level acts as a pivot.

The EUR/JPY exchange rate is likely to form a double top pattern. A double top is a reversal pattern that forms at the top of an uptrend. When the price meets horizontal resistance, it fails twice against a zone. In the case of the EUR/JPY pair, this zone is 133-134 and recently the cross has been rejected again.

JPY pairs have been trending upwards this year. It turned out that the yen was one of the weaker currencies on the forex, and the only thing keeping the pair from rallying further was the weak EUR.

On Wedneday, the EUR/USD fell below 1.15 in reaction to rising US inflation. The EUR/JPY reacts to the different movements of the two major pairs it represents - the EUR/USD and the USD/JPY. In other words, if the EUR/USD falls by 1% and the USD/JPY rises by 1%, the EUR/JPY, remains flat or unchanged.

Therefore, the inverse correlation of EUR/USD and USD/JPY must change for the double top pattern to form. One of the two majors must diverge. For example, EUR/USD could consolidate below 1.16 for a while, and at the same time, USD/JPY could drop to 108. Such developments would trigger more weakness in EUR/JPY.

What needs to happen next for the double top to be confirmed?

A few events must occur for the pattern to be confirmed. First, a daily close below the 130 level is mandatory. This level has been acting as a pivot, and it has been acting as both resistance to the price rise and support to the fall.

Second, the chart above shows that the 128 area is critical for the EUR/JPY cross. This is the area from which the pair has bounced recently, so we should expect it to act as support for any further attempts to break it.

Finally, a daily close below 128 would draw traders' attention to the double top pattern. Unless we see such a move, the double top is just a guess. But a daily close below should trigger more weakness, as stops will likely be below the key level.