EUR/JPY prints monthly highs above 129.70 amid buoyant risk appetite

• EUR/JPY printed fresh monthly highs above 129.70 on Thursday, supported by further improvements in broader risk appetite.
• FX market trade is likely to be subdued/low volume over the coming weeks amid year-end holidays.

EUR/JPY hit fresh monthly highs on Thursday, eclipsing the previous highs hit back on 16 December at 129.64 to momentarily trade above 129.70. The 129.60-70 area has been a significant area of resistance going all the way back to 23 November and if EUR/JPY can’t break above it on Thursday, further gains may have to wait until 2022. That’s because FX market trade on Friday will be very quiet/low volume given that it is Christmas Eve and liquidity conditions will be marred next week as well given the proximity to year-end celebrations.

If the 129.60-70 zone was convincingly broken to the upside, that would bring into focus the psychologically important 130.00 level, which happens to also coincide with EUR/JPY’s 50-day moving average. In the context of the more than 200 pip (or roughly 1.7%) rally from weekly lows at 127.50, another 30-40 pips doesn’t seem like too much of an ask, especially amid the backdrop of significantly improved risk appetite as the Omicron newsflow turned more positive.

After last week’s flurry of central bank activity, central bank policy divergence has taken a back seat as an FX market driver this week. But it is notable that a growing throng of ECB policymakers are calling for greater recognition of upside risks to the bank’s inflation forecasts. In 2022, EUR/JPY traders should recognise the upside risks that a hawkish ECB pivot (perhaps towards rate hikes in as little as 12 months and a sooner than anticipated end to QE) presents to EUR/JPY. Japan, by comparison, is not dealing with anything like the levels of inflation being witnessed in the Eurozone and no one expects the BoJ to alter its ultra-dovish monetary stance any time soon.