EUR/JPY rallies on Monday, but capped at 128.00 level by medium-term downtrend

• EUR/JPY rallied 0.4% on Monday but was capped at 128.00 by a key down-trend.
• The pair was supported by an upturn in broad risk appetite on more positive Covid-19 news.
• But technicians note that EUR/JPY has formed a descending triangle in recent sessions, which could signal a bearish breakout.

EUR/JPY rallied on Monday to test a key down-trend that has been capping the price action going all the way back to the start of November. The downtrend has been providing resistance close to the 128.00 level and has been capping the price action so far on the session. On the day, the pair is up 0.4%.

EUR/JPY has been suppressed in recent sessions by concerns about the implications that the emergence of Omicron will have on the global economic outlook. This compounded concerns about the short-term economic outlook for the Eurozone, which is already suffering from an unprecedented surge in Covid-19 (delta) infections which has seen countries move to reimpose various lockdown/health restrictions.

But the tone of the news since the weekend has been more optimistic on Omicron. As more data/anecdotal evidence comes from South Africa, momentum is building behind the idea that the new variant is much milder than past variants such as delta. Over the weekend, top US infectious disease export Anthony Fauci said on CNN that it doesn’t look like Omicron has a “great degree of severity”.  

The shift in the tone of news has helped support a broad-based improvement in risk appetite on Monday that is helping global equity and commodity markets and risk-sensitive currencies. By the same token, demand for safe-haven currencies like the yen has been undermined, hence why EUR/JPY has been able to recover.

Should the tone of news continue to improve, the pair might be able to break to the north of its recent downtrend, which could open the door to a run towards key resistance in the 128.80 area and then above that in the 129.50 area. However, technicians would note that EUR/JPY has formed a descending triangle in recent sessions, with support coming in in the 127.50 area. These patterns are often a sign that a bearish break is upcoming. A break below the key 127.50 area could open the door to an extension of losses all the way to the next significant area of support around 125.10.