A classic reaction in the markets to the outcome of the French elections. It was widely expected that pro-euro centrist Emmanuel Macron was going to become the new President of France and that he would beat the euro-sceptic Marine Le Pen by a wide margin. And so it proved.

Given that possibility, Friday's sharp moves in some markets - including the DAX future, which surged disproportionately higher - looked bizarre to me. Unsurprisingly, the German index has been quick to undo that move at the start of this week as speculators sold their bullish positions, some at healthy profits. The appetite for risk has fallen further at the start of this week because there has been further evidence of a slowing Chinese economy. After the weakness in manufacturing PMIs, the latest trade figures for April, released overnight, have revealed a sharp slowdown in exports growth to 13.4% from 22.3% year-over-year while imports have also weakened.

However, in the Eurozone things are starting to look bright. After the recent pickup in economic surprises, today saw German factory orders come in at +1.0% for March, which was more than +0.7% expected. With European earnings also being generally positive so far, I am expecting to see the bullish trend restoring itself once the profit-taking phase ends. After all, the election outcome is a clear vote of confidence for European unity. What's more, the favourable monetary conditions in the Eurozone combined with stronger data, earnings and the lack of any significantly bearish catalyst means speculators have more reasons to be optimistic than pessimistic at the moment.

As far as the euro is concerned, well it too may find support, especially against currencies where the central bank is more dovish than the ECB. The EUR/JPY, is such an example. This yen pair has stormed higher recently, not only because of the euro’s strength but also due to the on-going risk-on trade which has soured the appetite for safe-haven yen.

Overnight, the EUR/JPY gapped above its key resistance level at 124.00, but along with all the euro crosses, it has drifted back within its existing long-term range. However price action looks bullish and if the EUR/JPY were to reclaim the 124 handle again then we could see a sharp continuation in the direction of the current trend. It is just that at the moment it is not clear whether the gap above 124 was a fake out (bearish) or a break in market structure (bullish) of lower lows and lower highs.

A decisive breakout above 124 may target 126.50 and the 130.00 next. The former was a key reference point in the past and it converges with the 127.2% Fibonacci extension level of the most recent drop. Meanwhile the psychological 130 handle marks the point D of an AB=CD move. In addition, the 161.8% Fibonacci extension level converges with the 50% retracement against the long-term bear trend. So it would be an ideal bullish target, even if it is currently 650+ pips away from that level.

Meanwhile if the move above the 124 handle proves to be a fake out or a false break then we may see the EUR/JPY head back significantly lower. From its high, the EUR/JPY has already fallen by more than 100 pips, but it was bouncing back around the 123.00 support level at the time of writing. In the event the weakness persists then watch 122.80 and 112.00 as the next potential support levels. Below the latter, and we will drop our bullish bias.

Content Curiosity Of Fawad Razaqzada | Technical Analyst | FOREX.com