EUR/JPY Forecast: eyes 126 – key support by Friday

EUR/JPY extends its downward trajectory largely as the shared currency remains heavily offered versus the Japanese yen during the European session on looming Greece debt concerns. While a weaker yen versus the greenback cushions the losses in the cross. The US dollar index which measures the relative performance of the greenback against six major currencies, remains boosted and trades at 98.51, recording 0.36% gain on the day. At the moment, EUR/JPY trades lower by -0.17% at 127.79 levels, moving away from session lows posted at 127.46 levels in early European trades.

Technically, on the daily chart, EUR/JPY continues to trade in a short-term downtrend channel, with cross finding good support at 126 levels. On the same chart, the cross remains below all its moving averages indicating persistent underlying weakness. Moreover, the pair broke below the crucial 10-DMA located at 127.70, which triggered a fresh sell-off, knocking-off EUR/JPY to session lows at 127.46. Currently, the cross continues to trade around the 10-DMA support-turned resistance indicating more room for declines. The daily RSI at sub 40 remains in the bear range and aims lower, also supporting the case for further downside in the making.

Adding to this, Valeria Bednarik, Chief Analyst at FXStreet explained, "In the 4 hours chart the price remained below its moving averages that maintain strong bearish slopes, whilst the technical indicators head lower towards their mid-lines, suggesting some additional declines on a break below the mentioned 127.70 level."

Hence, with above technical factors at play, it appears that the EUR/JPY cross is headed for a retest of a critical support located at 126 levels within a week.

On the macroeconomic front, amid underlying broad based US strength; we anticipate the shared currency to underperform the Japanese yen in the week ahead against a back drop of impending Greece debt woes. Moreover, uncertainties surrounding Greece concerns continue to pull the euro down, with the pressure rising as Friday’s Euro group meeting approaches.

The Greek crisis has worsened with default risks rising unless bailout funds are made available very soon. Greece may be in imminent danger of running out of cash. The Greek government has now requested that local municipalities to transfer cash to the central bank.

The latest development around Greece appears that the ECB is contemplating curbs on Greek bank support if Greece reforms progress is absent. ECB is studying measures to increase haircuts for Greek banks accessing Emergency Liquidity Assistance (ELA) and may roll out 3 options to reduce central bank risks.

Greek Prime Minister Alexis Tsipras is expected to present detailed reforms plan before a meeting of euro zone finance ministers in Riga on April 24 to prevent a default which could trigger a Grexit. The next regular Euro group meeting is on May 11, just a day before the IMF requires a EUR 750 million loan repayment. It’s widely anticipated that a closure on the reforms plan is unlikely to be reached until May 11 meeting.

On the JPY side of the story, the Japanese yen continues to move within a 250 pips range against its US counterpart over the past month and the range trade is expected to continue in the week ahead with 120.50 posing as a strong resistance and 118.50 as a major support.

To conclude, Greece crisis is likely to be the dominating theme in the week ahead with the shared currency expected to remain pressured across the board. This may support the case for EUR/JPY to retest of 126 levels in the near term. The pair is likely to find a good support at 126.80, below which EUR bears may take over, driving EUR/JPY to 126 handle. However, a failure to breach 126.80 levels, the pair may rebound to 128.70 resistance zone.