The EURJPY pair formed a possible bearish divergence on the daily chart. Last Friday’s closing established a new higher high since the June ECB Meeting, while the RSI does not confirm the move.
Coincidence or not, the divergence comes at a time when the Euro seems offered across the FX dashboard. For example, the EURUSD pair, rejected at 1.19, trades two hundred pips lower.
The generalized Euro weakness started with the weak GDP data last Friday. The EURJPY pair’s late reaction reflects only the bounce seen in the USDJPY pair at the end of the trading month.
If judged by the drop in the GDP, the Euro weakness makes sense. The Eurozone GDP fell by over 12% although it fell harder in countries like Spain – over 18% economic contraction in the second quarter of 2020.
The deeper than expected contraction puts a question mark on the recovery fund’s ability to tackle the coronavirus economic recession. For example, the Italian GDP shrank less than the Spanish one (roughly -12%), but the Italians get more money from the recovery fund.
Two days from now, the Bundesbank is set to respond to the German Constitutional Court ruling that some of its APP purchases did not respect the proportionality principle. If the markets perceive the Bundesbank’s message as not enough to solve the legal issue, the Euro may become vulnerable.
The EURJPY bearish divergence is visible on the daily chart. While the market formed two consecutive highs, the RSI diverged.
However, traders are well-aware that divergences are tricky patterns to trade. As such, the best approach to trade such a divergence is to wait for the market to break south of 123. When it happens, place a stop-loss order at the second high. Finally, measure that distance and project it to the downside twice or three times so to find the take-profit level that corresponds to a 1:2 or 1:3 risk-reward ratio.
