EUR JPY bounces but still carries significant downside risk

EUR/JPY bounced modestly on Thursday afternoon as global equity markets took a breather and rebounded off their recent lows. This alleviated some pressure from EUR/JPY as the safe haven yen eased off its latest highs.

Despite Thursday’s rise for EUR/JPY, the currency pair continues to trade within a tight consolidation just off last week’s eight-month low of 126.77. This consolidation has currently formed an inverted pennant pattern, which is generally seen as a potentially bearish chart formation.

The pennant pattern began to form after price action in the past week, during the first trading week of the New Year, plunged below a major down trend channel that extends back to last June’s 141.00-area high. Since that high, EUR/JPY has fallen steadily within this channel, forming progressively lower lows and lower highs. Last week’s breakdown below the channel signifies an acceleration, or intensification, of the bearish momentum.

Having consolidated within the inverted pennant pattern under this descending trend channel, EUR/JPY continues to display a significant bearish bias. This should especially be the case if further volatility in the global equity markets continues to prompt safe haven flows towards the Japanese yen.

With major resistance to the upside continuing to reside around the recently broken 130.00 level, any breakdown below the current pennant pattern should target key support around the important 126.00 level, which was last approached to the downside last April. Any further bearish momentum could then begin to target the 123.00 support level.

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