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EUR/JPY could extend breakdown on euro “overshoot” and rising risk concerns

Thursday’s release of minutes from July’s European Central Bank policy meeting resulted in a knee-jerk fall for the euro, as concerns were expressed over the possibility of the common currency “overshooting.” These concerns by the central bank are well-warranted, as the euro has risen on a steep trajectory against its major counterparts since April of this year.

At the same time, while geopolitical risks have been muted for the time being after the recent nuclear missile threats from North Korea (along with President Trump’s threats in response) temporarily faded into the background, safe-haven assets like gold and the Japanese yen stand poised to resume their recent rallies when impending risk concerns inevitably return. In the US, the latest political trouble in the White House has provided elevated volatility in the markets. Key business leaders and members of Congress, most notably Republicans, have abandoned support for President Trump in the past few days over highly controversial remarks made by the President in the aftermath of a violent rally in Charlottesville, Virginia. Worries that conflicts between Trump and Congress will disrupt key pro-business initiatives weighed heavily on equity markets Thursday.

The combination of an ECB-pressured euro and the likelihood of rising geopolitical risk concerns boosting the safe-haven yen has the potential to extend the recent EUR/JPY breakdown. Last week, the currency pair made a tentative breakdown below a key uptrend line that represents the sharp 4-month bullish trend that launched from the April 115.00-area lows. After the trendline breakdown, price rebounded to re-test the underside of the trendline before falling once again on Thursday after the ECB release.

With further euro pressure and yen demand, EUR/JPY could be poised to extend its breakdown below last week’s lows. In that event, a drop below the 128.00 support level could target the next major downside objective at the key 126.00 support level, which also represents a major 61.8% Fibonacci retracement.

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