EUR/JPY: forecast following the big 500 pip drop

The Japanese yen is taking its toll on the currency chart, as evidenced by the sharp drop in the EUR/JPY exchange rate. The pair made a double top at 133, and since then it has fallen over 500 pips.

This year brought a rally in JPY pairs. Due to the rally in the US stock market, investors sold the JPY across the board.

The rally was most visible in the USD/JPY pair - it rose from the 102 area to over 115. However, other cross pairs, such as the EUR/JPY seen below, outperformed.

Yet, in the case of the EUR/JPY exchange rate, it encountered strong resistance in the 133 area. It has formed what looks like a double top pattern, and the recent 500 pip drop is putting more downward pressure.

Horizontal support holds for now

This is not the first time the market has reacted to horizontal support in the 128 area. In fact, this is the area from which the market bounced in late summer before threatening to make a new high for the year.

Therefore, a decisive close below 128 would put more pressure on the market as the double top pattern becomes more evident. The break of the neckline should trigger more weakness, as the measured movement of the pattern suggests a decline to 123 and below.

Rising inflation does not help

Today we have the Eurozone HICP data and upside risks to consensus expectations. We have seen that Spanish and German inflation continues to rise, so the consensus of 2.2% could easily be exceeded.

Yet the ECB is not planning anything. As ECB Executive Board member Isabel Schnabel just suggested, inflation is still considered temporary.

As such, the ECB is in no hurry to raise rates any time soon, which makes it difficult to buy the common currency in the event of a decline. Therefore, the fundamental picture complements the technical picture, and further EUR/JPY weakness is to be expected.

Add to this the possibility of investors taking profits as the end of the trading year approaches, and it is even harder to see a rebound from current levels.