EUR/JPY Outlook: Carry Trade Opportunity Emerges Despite Correction

Summary:
• Diverging monetary policy means that the potential for carry trade opportunities to emerge on the EUR/JPY have emerged.

The EUR/JPY is down 0.52%, as the bulls take a back seat at the site of a previous high, setting up the potential for the price action to form a double top and enforce a correction on the pair.

The pair is now trading at highs last seen in 2014, following the reluctance of the Bank of Japan to tighten its monetary policy. In contrast, the market is pricing in at least two rate hikes in 2022 by the European Central Bank in response to rising Eurozone inflation. The divergence in monetary policy expectations allowed the Euro to embark on a 10-day winning streak between 26 May and 8 June, followed by another three-day push to the upside in the trading sessions before today’s correction. 

Last week, the Bank of Japan maintained its dovish stance on monetary policy, further widening the rate differentials between the Yen and its peers. As a result, the potential for a return to the carry trade opportunities of the 2000s has increased, and traders have pounced on the opportunity. As a result, the EUR/JPY is now trading at 8-year highs, heading into next week’s data set that includes a look at Japan’s inflation rate for May (year-on-year). This figure currently stands at 2.5%. It would be interesting to watch the response of the Bank of Japan if the inflation rate surprised to the upside. 

EUR/JPY Outlook

The rejection of the price action at the 144.114 resistance poses a threat to the further advance of the pair. To complete the double top, the bears must break down the 142.058 support (20 June 2022 high) and the neckline at the 139.598 support level (14 June low). This scenario brings in 135.056 as the potential completion point of the measured move from the pattern. Only a breakdown of the 138.125 support (16 June low) and the 126.581 pivot (3 May low and 18 May high) allows for the attainment of the completion point. Keep an eye on the emerging wedge pattern. 

Conversely, restoration of the uptrend follows the break of the 144.114 resistance level. Therefore, the initial target following the break of the 9 June/21 June peaks is 145.814. Additional targets to the north following clearance of the 145.814 resistance include the 147.222 price level (14 November 2014 high) and the 149.138 resistance level, where the previous high of 18 November 2014 was last seen.

EUR/JPY: Daily Chart