EUR/JPY rises to 5-day high, is it a bull trap?

EUR/JPY rose to a 5-day high of 132.87 during the overnight trade as Catalonia's leader allowed for talks with Madrid even as he proclaimed independence from Spain.

The bid tone around the common currency improved after Cataln leader Carles Puigdemont suspended the results of the referendum and opened doors for talks with Madrid government.  Meanwhile, the gains were capped by strength in the Japanese Yen on fears that Trump's tax reform plan could be hitting a major speed bump.

The EUR/JPY closed on a positive note yesterday at 132.77 and remains flat lined in Asia. The daily chart shows, the pair has left another higher low as it rallied from 131.85 (Monday's low) to 132.87 (yesterday's high). The trend line sloping higher from June 15 low and August 18 low remains intact. The price action gives techs a bullish lean, however, the bond yield differential suggests the rally from 131.85 could be a bull trap.

• The German-Japan 10- year yield spread fell to 39 basis points yesterday vs. 41 basis points on Friday. The spread stands well below the recent high of 44 basis points.
• Clearly, the yield differential does not support gains in the EUR/JPY pair.

EUR/JPY Technical Levels

A break above 133.12 (Sep 29 high) would open up upside towards 134.00 (zero levels) and 134.41 (Sep 22 high). On the downside, breach of support at 132.40 (5-DMA) could yield a pullback to 131.83 (trend line support). An end of the day close below 131.83 would signal the cross has topped out at 134.41. The pair could then test 130.60 (Sep 15 low).