Recent Euro weakness puts EUR/JPY at what may be an inflection point. Down 10 big figures in just over a month, the charts are pointing to an oversold position. Speculation that the European Central Bank will introduce stimulus following it's meeting on January 22 is reaching feverish proportions, despite no clear mechanism for an ECB QE program. The technicals are in line with a scenario where the ECB confounds market expectations, potentially leading to a significant bounce for the Euro.
Another potential driver of a rise in EUR/JPY could be the Bank of Japan's action at it's meeting on January 20-21. Falling oil prices are imperiling the BoJ's desire to boost inflation. While Governor Kuroda has stated the October increase in asset purchases was not a response to falling energy prices, the potential for further funds injection is real.
Here's the chart:
EUR/JPY re-connected with the previous downtrend line, bouncing off 139.75. Note the divergence with the RSI. The pair made a lower low yesterday, but the RSI did not. The RSI remains in oversold territory below 20%.
Any bounce may be significant, given the size of the recent fall. A modest Fibonacci retracement to 38.1% would give a target around 143.60. A 61.8% retracement would be closer to 146.00.