The EUR/JPY cross is at the year’s highs. It consolidated for the entire month-and-a-half so far in 2021 and recently popped higher.
It appears that the market formed a symmetrical triangle that broke recently and now guns for the measured move. However, such triangles typically have a limited price action, and therefore contrarian traders may argue that this is a false breakout and the price is bound for a sharp reversal.
Euro trades at much higher levels than the economic and monetary conditions would suggest. As the pandemic leveled the playing field for monetary and fiscal measures, the currency market is likely to shift to a new regime in the period ahead. That is a regime where currencies will reflect the economic strength rather than the actions of the central bank. From this point of view, the Euro looks weak as the European Union lags on both fronts, monetary and fiscal, the action seen in the United States and in some other parts of the world.
A false breakout implies that the price will retrace to the breakout point and decisively move lower. As such, aggressive bears or contrarians may want to wait for the EUR/JPY pair to retrace below the previous high (i.e., the blue line on the chart below) before going short with a stop at the highs and a risk-reward ratio of 1:2.
