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Unfortunately for me, EUR/JPY only went as low as 112.50, which was still a good 30 pips away from my entry at 112.20.

After staying steady for the better part of the last two days, the pair finally shot up and broke the channel on some rather hawkish comments by ECB quarterback Jean Claude Trichet.

During the ECB rate statement yesterday, not only did the ECB raise its inflation and GDP forecasts for 2011, but Trichet even said that a rate hike next month was a real possibility!

Obviously, this sent euro bulls charging, sending EUR/JPY up a solid 100 pips right after the statement.

EUR/JPY chart

While I think other market playaz were expecting rate hikes for this year, nobody was expecting the ECB to be raising rates so soon.

Next month? Right before the Easter holidays? Right before I get to eat some Easter bunnies? Oh boy!

So no, I didn’t get triggered, but it seems that I was right about being bullish on the euro. For now, I’m gonna keep my eye on the longer time frames of EUR/JPY.

If you look at the daily chart, you might see an inverted head and shoulders formation forming. If you look at the weekly chart, that looks like a clear double bottom forming!

With the euro on the rise lately, if we see EUR/JPY break past key resistance in these areas, we could be in for a humongous move. You can bet your bottom dollar that I’m looking to get in on that play!

Trade Idea

EUR/JPY chart

Lip-smackin’ good, that’s what that channel on EUR/JPY is! Pull out your 1-hour charts and you’ll see exactly what I’m talking about.

Price has been bouncin’ around in there for quite some time now, and it’s less than 50 pips away from hitting the previous week’s low (PWL) at 112.20. This level has done well to ward off euro bears in the past, and I’m betting it’ll serve as support once more.

Stochastic even seems to agree, judging by the way it’s starting to turn up from oversold territory.

As for fundamentals, I think we’re seeing a slight shift in sentiment towards the euro. Right now, traders seem to be more focused on inflation and an ECB interest rate hike rather than the euro zone’s debt problems.

Risk aversion caused by tension in the Middle East seems to have toned down a bit as well. With that in mind, I think we should continue to see the euro gain.

Of course, its fate will depend heavily on what the ECB will say in its rate decision and press conference tomorrow.

But in light of the positive reports we’ve been getting from the big EZ lately, most recently yesterday’s upbeat employment data, I’m expecting ECB President Jean-Claude Trichet to remain hawkish. C’mon man, don’t let me down!

Anyway, here’s how I’ve set up this trade:

Long EUR/JPY at the PWL (112.20), stop loss at 111.60, add to the position at 112.80, take profit at 113.63.

As you can see, this trade has a pretty sweet risk-reward trade-off. And to make it even better, I’ll be looking to add to my position midway at around 112.80. All in all, if things go as planned, this should give me a return about three times the size of my risked capital.

For now, just gotta wait and see if the price retests the PWL.

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