By Dhara Ranasinghe
LONDON, Nov 28 - The euro's failure to sustain gains above the psychologically key 110 level against the yen has sullied the single currency's chart outlook, analysts say.
Broad-based yen gains, on news that S&P had downgraded Japan's debt by only one notch instead of the expected two notches, pulled the single currency off four-week highs above 110 yen hit earlier on Wednesday.
Chartists said the euro's gains had now been capped in the 110 area and the move below chart support around 109.20 yen, a congestion area, opened the way for a renewed move lower.
Including Wednesday's move, the euro has pushed above the 110 yen level at least five times in the past six months before breaking back lower.
"Today's move above 110 was important," said Gerry Celaya, chief strategist at RedTower Research.
"But the move below 109.20/15 yen means there is pressure to target support in the 108.70/60 area."
The euro stood around 108.95 yen in mid-day European trade, more than one percent below peaks hit earlier around 110.40.
SOFTER EURO ON CARDS
Analysts said the prospects for a weaker euro could be seen in momentum indicators such as stochastics and the relative strength index, which suggest where a currency is heading.
They added that the daily stochastics had peaked above the 80 level, indicating a change in the euro's direction.
Chart support for the euro was seen in the 109/108.90 yen area, the 100-day moving average and 108.70 -- the 38.2 percent Fibonacci retracement level of the rally from 106.85 to 109.80.
"If the euro breaks through the 100-day moving average support, this would be another sign that the euro is likely to head lower against the yen," said Henry Wilkes, senior vice president of foreign exchange at Brown Brothers Harriman. The outlook for the single currency was even bleaker below 108.30, the 200-day moving average, with chartists looking for a move down to 107.80 and then a test of the 106.80 six-week low set in early November.
110 YEN HARD TO CRACK?
Chart watchers said the single currency needed to break back above the 109.60/70 area to make another stab at the 110 level.
Above 110 yen, the euro was seen on course to target resistance around 110.30/40, a peak set on the 31 October and then 111.75/80, a high set at the start of October.
A move to 111.80 would take the euro to within two percent of this year's peaks set in early April around 113.70.
Some analysts said the euro would need more than a chart break higher against the yen before sentiment towards the single currency turned bullish.
"It would either take a fundamental change in the euro or the yen for the single currency to sustain gains above 110," said Wilkes at Brown Brothers Harriman.
Others, however, were slightly more optimistic about the euro's short-term fortunes.
"If the euro can hold above 108.70 chart support, it may be able to push higher in the short-term," said Phil Roberts, foreign exchange technical analyst at Barclays Capital.