EUR/JPY recovers back from session lows alongside stocks to 130.50 area, remains vulnerable risk appetite

• EUR/JPY is trading close to the 130.50 mark following a volatile session dominated by risk-off flows.
• Though the pair did recover from earlier lows in tandem with US stocks, the scope for further downside is high.

EUR/JPY broke to the south of a bullish trend channel on Monday and the following acceleration of technical selling pressure eventually pushed it to lows in the 130.10s from Asia Pacific levels in the 131.20s. But the pair has recovered some posture in recent trade and is back above 130.50, though further gains are for now being stopped by the presence of the 200-day moving average at 130.56. The recovery from earlier session lows in EUR/JPY coincides with a recovery in US equity markets. Though still down on the day by about 0.5%, the Nasdaq 100 was at one point over 2.5% lower.

Spurring the downturn in risk appetite that has seen the safe-haven yen outperform in the G10 space, though USD has also done well, has been concerns about more abrupt Fed tightening. Monday’s rebound from lows, for stocks or for EUR/JPY, should not be taken as an indication that these worries are over. Indeed, investors nervously await US December Consumer Price Inflation data on Wednesday, which is expected to show a further build-up of inflationary pressures and further turn up the heat on the Fed to act this year. There will also be plenty of Fed speak this week, including from Fed Chair Jerome Powell and Fed Vice Chair Lael Brainard, both of whom testify at their respectively nomination confirmation hearings before the Senate.

In other words, there are plenty of potential catalysts to rekindle Fed tightening fears this week, meaning plenty of opportunity for further EUR/JPY downside. Key levels to watch include the psychologcially important 130.00 mark, which also coincides with last week’s lows and an important balance area at 129.60, which also coincides with the 21 and 50-day moving averages. EUR/JPY has so far ignored hawkish comments from influential ECB governing council member Isabel Schnabel over the weekend who talked about how if inflation continues to come in higher than expected, the ECB may have to adjust policy to combat it. Further hawkish ECB speak after last week’s hot inflation numbers could well spur some euro appreciation versus the yen, with no changes expected to BoJ policy for the foreseeable future.