A head and shoulders pattern on the EURJPY cross offers a tempting risk-reward ratio for aggressive traders. Forming at the top of a rising trend, head and shoulders’ measured moves often attract contrarian traders.
The temptation is even higher ahead of a USD event. The Jackson Hole event is about to start in the United States, and Fed’s Powell’s introductory remarks will move the USD. However, when trading a cross pair like the EURJPY, the USD does not affect its volatility much. Hence, it moves based on the differences between its corresponding majors – the EURUSD and the USDJPY.
The USDJPY trades literally with no direction. It did the same during the 2016 Presidential elections in the United States, but back then, it was strongly correlated to the U.S. equity market. That is not the case today. However, the USD major will likely keep a tight range in the next couple of months that remained until the election day.
On the EURUSD front, the major seems stretched close to 1.20. Falling Italian yields or cyclical out-performance are some of the reasons investors use as an explanation for such a high EURUSD rate. But at such levels, the EURUSD pair is at 1.5 standard deviations above where the two factors mentioned earlier put it. As such, a correction is long due at least from the Euro point of view.
The EURJPY cross appears to form a head and shoulders pattern with the head above 126.50. With a bit of flexibility, we may even say that it formed a double top at the 126.50 area – it tried higher twice but failed every time.
Aggressive traders may want to go short and place a stop-loss order at the highs in the right shoulder. The projected measured move points to 122.50. Thus, the risk-reward ratio exceeds 1:3, justifying a trade on the short side.
