EUR/JPY in the Buyzone

- EUR/JPY pulls-back and provides bulls scope to reload long positions.

- JPY has lost ground after CPI data confirms moribund inflation outlook.

- Bullish candlestick pattern required for confirmation of move higher.

© Lisa L, Adobe Stock

EUR/JPY has pulled back into what traders call 'the buyzone' on daily charts, which is the space between the 10 and 20 moving averages (MAs), which many traders see as the optimum time to buy in the middle of an up-trending market.

The pair, which started going up in May as monetary policy expectations in Europe firmed, peaked on Tuesday at 132.00, after breaking above the key May highs, before pulling back for two days to its current level at 130.81.

Above: EUR/JPY rate shown at daily intervals.

Meanwhile it has fallen back into the space between the 10 and 20 simple moving averages (SMAs), which some traders call the 'buyzone' on account of it being a place where shallow pull-backs often reverse and start going higher again.

The Yen had gained ground through the middle of this week as investors saw the currency as fundamentally undervalued, however, it failed to capitalise on the turnaround in perceptions after inflation data on Thursday came out lower-than-expected June, registering only a 0.7% rise in June compared to the 0.8% forecast. Compared to counterparts this is sluggish indeed.

It suggests the Bank of Japan (BOJ) will not be in a hurry to end its extraordinary stimulus measures and raise interest rates anytime soon and interest rates are the main driver of FX, with higher rates driving currencies up by attracting greater inflows of foreign capital, drawn by the expectation of higher returns.

Although the EUR/JPY has now pulled back into the buyzone which suggests an optimum time to buy, traders would normally first wait for a bullish confirmation signal from the charts, such as the formation of a bullish Japanese candlestick pattern (see table below), such as a hammer, bullish engulfing or piercing line, before actually pressing the button to buy.

As far as upside expectations go, the pair woulds be expected to reach the 132.00 highs again as a minimum expectation but more probably the 133.49 April highs too.

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