EUR/JPY rallies above 136.00, eyes pennant breakout towards 140.00 as hawkish ECB provides tailwinds

• EUR/JPY is above 136.00 and eyeing last week’s highs following hawkish ECB commentary.
• The pair has formed a pennant and could break higher towards 140.00 should Eurozone yields kick on.

Hawkish interest rate guidance from European Central Bank President Christine Lagarde, who signaled that the bank is likely to have lifted interest rates out of negative territory by the end of September, boosted the euro against most of its G10 peers on Monday. That helped lift EUR/JPY to above 136.00 level, where it is now probing its 21-Day Moving Average, whilst bulls eye a test of last week’s highs in the upper 136.00s.

At current levels, around 136.10, the pair is trading with on-the-day gains of about 0.9%, with robust May German IFO survey data released earlier in the day likely contributing to the euro’s robust start to the week. Looking ahead, Eurozone business survey data remains in focus with the release of flash May Markit PMI survey data out on Tuesday. Survey data is being closely scrutinised at the moment with traders wanting to guage how the Eurozone economy is holding up amid the ongoing Russo-Ukraine war.

For now, ECB policymakers deem the Eurozone economy as still holding up well, with Bank of France head and European Central Bank governing council member Francois Villeroy de Galhau on Monday characterised growth as “resilient”, before saying that the deal on near-term rate hikes is probably done. Aside from Tuesday’s survey data, focus this week will remain on the various ECB and BoJ policymakers scheduled to speak. Given the policy divergence between the two, risks arguably remain tilted to the upside for EUR/JPY.

The pair is at present trapped within a pennant structure that has been in play since late April. A bullish breakout could see EUR/USD rally back towards annual highs in the 140.00 area, though such a move would likely need to be driven by further upside in Eurozone yields to drive the Eurozone/Japan rate differential higher.