EURGBP Rebounds
The EURJPY cross pair benefited most of the recent news surrounding the Eurozone. With the USDJPY major stuck in a very tight range between 106.50 and 108, the EURUSD drove the price action in the cross.
The easiest way to understand the currency market is to focus on the US Dollar (USD). The world’s reserve currency literally splits the Forex dashboard into two parts – major and cross pairs. A major always has the USD in its componence. In contrast, cross pairs do not.
Because of this relationship, each cross’s move depends on its two majors. In the case of the EURJPY pair, the two majors are the EURUSD and USDJPY pairs.
If one day the EURUSD is up 1% and the USDJPY is down 1%, the EURJPY remains flat. In other words, one can trade the cross, or any one of the three currency pairs in the threesome, without even looking at a chart.
The relationship also tells much about the driver on any cross. In this case, as mentioned at the start of the article, the EURUSD drove the price action in the EURJPY cross lately, as the USDJPY is basically flat.
The EURJPY pair almost reached June 2020 high, when the ECB press conference sent the Euro higher across the board. But this is the second attempt above 124, and failure to break much higher opens the gates for a potential reversal pattern – a double top formation.
Naturally, it is impossible to know in advance if the pair truly reverses from the highs, but as traders, we can plan for each and every step. Selling the highs makes no sense for a money management perspective, but selling after the fact does.
Therefore, the thing to do is to wait and see if the price turns and breaks the rising trend’s trendline. Ideally, the EURJPY cross should put a marginally new high above 124.40 before turning and breaking the rising trendline. Even if not, the current setup es enough for a double top formation.
By the time the trendline is broken, shorting the pair against the highs makes sense. For the take profit, just use a 1:3 risk-reward ratio, as the measured move for the double top is more than enough to cover for it.
