EURJPY has been trending lower on its longer-term time frames but the opportunity for a countertrend setup is emerging.

Price is currently testing the bottom of its descending channel visible on the 4-hour and daily charts and might be due for a bounce.

If support at the 127.00 handle holds, a rally to the channel resistance around 129.50 to 130.00 might take place. This is also in line with the 100 SMA, which has served as a dynamic resistance level in the past. This moving average is still below the longer-term 200 SMA, confirming that the downtrend is likely to carry on and that the path of least resistance is to the downside. 

Stochastic and RSI are still moving lower but both oscillators are already nearing oversold levels. This suggests that selling pressure could fade soon and euro bulls could take over, especially with profit-taking activity likely to take place before the trading week closes.

Event risks for this setup include the preliminary GDP releases from the euro zone and its top economies such as Germany and Italy. A 0.3% growth figure is eyed for the region, although a weaker than expected reading might spur more losses for the shared currency.

Concerns about the banking sector in Europe are currently weighing on euro zone equity markets, along with the resurfacing possibility of a Grexit. IMF officials have noted that the country has yet to come up with an economic reform plan that can effectively trim its deficit.

Also, the threat of intervention from the Bank of Japan or Japanese government officials is keeping the yen’s gains in check. Speculations that authorities are already watching forex moves very closely and might be prepared to act if necessary have already triggered a strong bounce for EURJPY in yesterday’s late European session. 

By Kate Curtis from Trader’s Way