EUR/JPY Cutting an Unstable Range Ahead of ECB Decision

10/08/2009 12:01 am EST

Focus: FOREX

Conditions are still very unfavorable for range-based trading. While more crosses and general risk sentiment itself has taken to a holding pattern, there is little respect for hard technical levels and the threat of a true trend revival is high. It is safe to say that those who aren’t comfortable with the greater level of risk should avoid range trading and employ other strategies.

How Stable Is the EUR/JPY Range?

Levels to Watch:
Range Top: 131.60 (Fib, Pivot)
Range Bottom: 129.75 (Fib, SMA, Channel)

• While the euro is not among the upper echelons of the high risk/high yield field, it nonetheless acts as a straightforward counterpart to the Japanese funding currency. This will keep EUR/JPY price action interesting as the vagaries of sentiment drivers can spark volatility or trend at the drop of a hat. Outside of this primary driver, the economic calendar is well rounded, but Thursday’s ECB rate decision offers the greatest promise for price action.

• There are respectable technicals to work with on this liquid pair, but they don’t exactly hold without some sort of test through volatility. Putting recent price action into context, the late-September plunge called an end to a long-term rising wedge. We are consolidating below the former support, and the new floor is a confluence of notable patterns near 129.75

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Suggested Strategy

• Long: Going against the grain, an aggressive entry of 129.85 is warranted.
• Stop: A relatively tight range and high volatility means even a 129.25 stop may be insufficient. To secure profit, move the stop on the second lot to breakeven when the first target hits.
Target: The first objective is one-and-a-half times risk (90) at 130.75. The second is 131.35.

Trading Tip: EUR/JPY’s congestion pattern carries with it considerable risk. High volatility and the return of congestion directly after a major wedge breakout make for a pair that is very choppy, doesn’t hold its levels well, and is under considerable pressure. From a fundamental standpoint, this is a pair that may not react to every minor shift in investor sentiment, but it is nonetheless a primary driver. It is difficult to forecast swells in risk trends, and recent stability belies the current’s ability to immediately change tempo. A more manageable concern is tomorrow’s ECB rate decision. The group isn’t expected to hike rates, but they can perk speculation as to when they may in fact act. Altogether, it will be important to watch the range through the ECB decision and acknowledge the susceptibility of the pair’s range to volatility by removing all open orders by Friday. As for the suggested strategy, we are looking at a limited range that has produced false breakouts. Our first stop is relatively tight, but that is necessary considering the limited potential for return. Altogether, the CHF/JPY setup drawn up late last week is a more stable alternative to the EUR/JPY setup.

By John Kicklighter, currency strategist,

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