The EUR is retracing some of its recent losses yesterday and today, mainly driven by profit-taking and recovery from deeply oversold levels. Some optimism on the Russia-Ukraine war (i.e., some ceasefire could be agreed soon) seems to be helping too. However, all this is unlikely to provide lasting support for the EUR, and a resumption of the bearish trend seems more likely instead.

Sanctions on Russia won’t be removed any time soon. In fact, the sanctions are likely to last for a long, long time (as EU officials have noted themselves). Even if the war in Ukraine ends tomorrow, the Western allies (led by US&EU) are highly unlikely to remove sanctions on Russia as long as Putin is in power there. And it doesn’t seem like Putin will be going anywhere. So, lasting sanctions mean the negative impact on the EU economy will also be lasting. Thus, EURUSD (and EURJPY) should still be trading at much lower levels than present.

The ECB meets tomorrow, and they will likely try to sound as neutral as possible to avoid sending a wrong message at this time. In any case, they certainly can’t be hawkish like in February in the current circumstances. So, a dovish ECB tomorrow should also help to push the EUR lower from here.

Tomorrow is a busy day on the calendar. In addition to the ECB meeting, the US CPI inflation report will be released at the same time when the press conference with President Lagarde starts (2:30 pm CET). This pretty much ensures high volatility on the EURUSD pair, but could also mean attractive opportunities to trade.

There is also that meeting in Turkey tomorrow between the Ukrainian and Russian ministers of foreign affairs (Kuleba-Lavrov). Hopefully, they will achieve some sort of deal that will allow for the bloodshed in Ukraine to stop soon. Such an outcome may result in some positive EUR reaction, but that is still likely to be short-lived (as noted above).

The rebound in EURJPY over the past two days has been impressive, and the pair is now almost 400 pips off the Monday lows. However, this rally is now entering a key resistance in the 128.00 area on the daily chart (see below). 

It’s possible this is a dead-cat bounce, and a reversal lower could soon follow. The daily resistance here at 128.00 is an attractive area to consider short trades.

For potential entry signals, we can use the lower timeframes. For example, the hourly chart (see below) shows that this rally is now drastically overbought, with the RSI reading at 85. The 4-hour RSI is also nearing overbought (at 65 currently), while the Stochastic has already entered the overbought area there. 

All of this - coupled with the resistance area on the daily timeframe - suggests that some reaction here is very likely at this point. Look for a bearish reversal or signal on the 1H and 4H charts, which should signal that the daily resistance in the 128.00 area is holding.

Watching the EURUSD and USDJPY pairs is also important when trading EURJPY. In this regard, preferably, both EURUSD and USDJPY should be moving down or sideways. USDJPY is close to its 116.00 resistance zone, and it should stay below it for this short EURJPY trade to work well. If, for example, USDJPY breaks above 116.00 while EURUSD stays above 1.10 over the coming days, then the odds will turn against this short EURJPY trade.

Entry:

• Look to enter short near current levels (128.20), although for the moment, a convincing bearish signal on lower timeframes has not occurred;
• Alternatively, wait for such a more convincing signal to appear and then enter short

Stop loss:

• Above 129.50
• As noted above, the action on EURUSD and USDJPY will also shape the exit conditions for this trade. If EURUSD or USDJPY are breaking out to the upside, the conditions will turn much less favorable for short EURJPY

Targets:

• 1st - 126.50 zone
• 2nd - 124.50 lows
• 3rd - possibly fresh lows below 124.50