EUR/JPY drops to new three-year low within long-term downtrend

EUR/JPY dropped to a new three-year low of 120.30 early on Thursday, dipping slightly below its previous long-term low that was hit late last week, before paring its losses by the afternoon. Helping to drive the currency pair lower on Thursday was a general risk-off sentiment during the earlier part of the day that prompted the safe haven yen to gain favor.

From a longer-term perspective, the yen has been in strengthening mode against other major currencies since late last year, despite Japan’s hopes and efforts to weaken its currency. At the same time, the euro has felt some pressure due to a number of factors, including concerns over the economies and banks in the euro area as well as a persistently dovish European Central Bank that has recently been on the constant verge of instituting further easing measures.

Another very important factor that has and could potentially continue to weigh on EUR/JPY is the risk surrounding the UK’s EU referendum that will be held two weeks from now. During this referendum, UK voters will decide whether the country remains within the European Union or leaves it (popularly referred to as "Brexit"). Although more attention has been paid to the potentially far-reaching effects of a Brexit on the British pound and UK equity markets, euro area markets and the euro currency should also be significantly affected by both the speculative risk preceding the upcoming referendum and its actual outcome.

To make matters potentially even worse for EUR/JPY, both this risk and outcome are quite likely to promote general market turmoil, in which case risk aversion could further permeate market sentiment and lead to more buying of the safe haven yen.

From a technical perspective, the EUR/JPY’s bearish trend bias has been playing out for at least a year. This bearishness has been clearly outlined by a downtrend line beginning in August of last year that began to accelerate into an even more sharply-angled downtrend beginning in late January. Additionally, both the key 200-day and 50-day moving averages are clearly sloped rather steeply to the downside. Most recently, the clear succession of lower highs and lower lows broke down below key support around the 122.00 area late last week. With sustained trading below this 122.00 level, EUR/JPY could continue to move lower in the run-up to the EU referendum and, depending on the outcome, also after the votes are counted and the results are released. The next major downside targets on such a move are at the 119.00 and then 116.00 support levels.

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