EUR/JPY edged higher in Asian trading on Monday, changing hands near 186.50 after small losses a day earlier. The cross remains tilted to the upside while holding above the nine-period and 50-period Exponential Moving Averages (EMAs), with the shorter EMA positioned above the longer one. Momentum indicators also lean positive, as the 14-day Relative Strength Index (RSI) sits near 60, suggesting firm conditions without signalling overbought territory.
Chart patterns, however, frame a conflicting setup. EUR/JPY is climbing within a rising wedge, a formation that can precede a bearish reversal. Resistance is seen at the wedge’s upper boundary around 186.90; beyond that, the next area in focus is the all-time high of 187.95 set on April 17. Support starts at the nine-day EMA of 186.04, and then the 50-day EMA at 185.31, which coincides with the wedge’s lower boundary; a break lower would bring 181.87, the five-month low from March 16, into view alongside the seven-month low of 180.81.
Short-Term Bullish Momentum and Trading Opportunities
We are currently tracking a near-term bullish momentum for EUR/JPY as it trades around 186.50, holding safely above both its 9-period and 50-period EMAs. However, we believe derivative traders must tread carefully in the coming weeks because the pair is moving within a rising wedge pattern on the daily chart. This technical setup historically carries a high risk of a sharp bearish reversal, which could catch over-leveraged buyers off guard.
For those looking to trade the short-term upward trend, we recommend watching the upper boundary of the wedge near 186.90. If the pair breaks above this resistance, it could quickly test the historic high of 187.95. Derivative traders can utilize short-dated call options to capture this potential breakout while strictly limiting their capital risk.
Preparing for Potential Bearish Reversal
Conversely, we see compelling reasons to prepare for a bearish breakdown, especially as central bank yield spreads begin to shift. Historically, when EUR/JPY breaks below its rising wedge patterns, the sell-offs are swift, often triggering rapid 3% to 5% drops similar to past Japanese yen market interventions. If the price slips below the 50-day EMA at 185.31, we advise buying put options targeting the five-month low of 181.87.
With the 14-day RSI hovering near 60, momentum is firm but not yet overbought, meaning the market could consolidate within this wedge for a bit longer. We suggest setting tight stop-losses just below the 9-day EMA at 186.04 for any active long positions. This balanced strategy ensures we can capitalize on immediate gains while remaining fully prepared for a major trend reversal.
