EUR/JPY rebounds to mid-131.00s as euro benefits disproportionately from easing Ukraine/Russia tensions

• EUR/JPY saw a decent rebound on Tuesday as the geopolitical risk premia eased, propelling the pair into the mid-131.00s.
• In the scenario of continued de-escalation, a move back above 132.00 towards last week’s highs is on the cards.

EUR/JPY saw a decent rebound on Tuesday as the geopolitical risk premia that has weighed on the euro in recent days eased somewhat. The pair rallied back into the mid-131.00s and, at current levels in the 131.30s, is more than 1.0% above Monday’s near-130.00 lows with about 0.6% of that rally coming on Tuesday. Russia said it would partially withdraw troops from near the Ukraine border, as the nation continued to label Western warnings about potential military action against Ukraine as hysteria. Financial market participants read the move as de-escalating tensions somewhat, hence the more upbeat macro mood on Tuesday.

The general market theme was that stocks and risk-sensitive currencies rallied while safe-haven bonds and currencies underperformed, though the euro was a standout G10 performer on the day as traders assessed risks to the Russian gas import-dependent Eurozone as having lessened. That helped the euro shrug off weaker than expected German ZEW February survey results released in the European morning, while the second estimate of Eurozone Q4 GDP growth was unchanged from the first at 4.6% YoY and 0.3% QoQ.

Looking ahead, amid a lack of notable economic events on the Eurozone and Japanese economic calendars for the rest of the week, the main driver of EUR/JPY will remain geopolitics. If Friday arrives with no Russian military action having yet happened against Ukraine, EUR/JPY will have likely have continued to pare the losses it incurred last Friday on US warnings that war could break out as soon as this week. In the optimistic case where war does not happen and looks increasingly unlikely, EUR/JPY could likely rebounds back to the north of the 132.00 level and retest last week’s highs near 133.00.