EUR/JPY bullish breakout to continue well beyond 160

The currency markets are slow during the summer, and this year is no different. Whenever this happens, traders usually look at larger timeframes to position for the next move.

By interpreting and analyzing timeframes beyond the daily chart, trends are easier to spot. Such is the case of the EUR/JPY pair, which has been trending higher since February 2020, and there are no signs of change.

It now trades close to 160, but the chart below shows that more strength may lie ahead. More precisely, by looking at the weekly timeframe through the Elliott Waves lens, the recent EUR/JPY bullish breakout above 150 is just the start of something much bigger.

EUR/JPY bullish breakout is the start of an impulsive wave

The Elliott Waves theory divides the market moves into impulsive and corrective. An impulsive wave has five segments labeled with numbers, and corrective waves are labeled with letters.

Another characteristic of impulsive waves is that at least one of them must extend. Elliott calculated that an extended wave must exceed 161.8% of the next longest wave, and it applies only to the 1^st, the 3^rd, or the 5^th waves.

Also, the 3^rd wave extension is the most common setup. It means that the 3^rd wave in an impulsive structure must exceed 161.8% of either the 1^st or the 2^nd wave, depending on which is the longest.

Because during an impulsive structure, the 1^st wave’s length is the first one the Elliott trader knows, it is very common to calculate the minimum distance that the 3rd wave should travel to reach the extended level.

From left to right, the EUR/JPY currency pair bounced from the 114 area in February 2020 in what is the 1^st wave (in black). Next, the market formed a running correction for the 2^nd wave, which ended with a triangle.

The running nature of the 2^nd wave implies that the 3^rd wave will be much longer than 161.8% of the 1^st wave. It usually exceeds 461.8% or even more, and the price action must hold above the upward channel seen above.

In short, the EUR/JPY bullish breakout is here to stay as the market remains bid above the upper edge of the bullish channel. Look for 160 to be just a milestone in the quest for higher levels, such as 165 or even 170.