EUR/JPY falls back to 130.50s, eyes retest of weekly lows near 130.00 as geopolitical tensions bubble

• EUR/JPY dipped back to the 130.50s on Thursday as the yen outperformed on rising Russia/Ukraine geopolitical concerns.
• Shelling in Ukraine’s Eastern Donbas region has reportedly restarted as NATO warns Russia continues to amass troops on Ukraine’s border.
• If geopolitical tensions continue to rise, traders will eye a test of weekly lows in the 130.00 area. 

Having nearly hit 132.00 on Wednesday on hopes that Russia would follow through with pledges to withdraw troops from the Ukrainian border, EUR/JPY has reversed sharply lower on Thursday and now trades in the 130.50 region. That means the pair is back to trading within about 0.4% of Monday’s lows just to the north of the key 130.00 level and is down more than 1.0% from Wednesday’s weekly highs. Shelling between the armed forces of Ukraine and pro-Russia separatist forces in Ukraine’s Eastern Donbas region has reportedly resumed against the backdrop of Russia continuing to amass troops near Ukraine’s border.

Indeed, on Thursday various top NATO member nation leaders further amplified their warnings that a Russian invasion of Ukraine could be imminent. NATO leaders have also been warning that the country may be looking to stage some sort of false flag event to use as a pretext to invade and fighting in Ukraine’s East could provide such an opportunity. Amid fears of war and worsening NATO/Russia ties, risk assets have by and large been on the back foot, with the S&P 500 dropping 1.8%. This has meant that in FX markets, the yen has been an outperformer.

That partly explains why EUR/JPY has dipped on Thursday, though when NATO tensions with Russia rise, that has led to euro underperformance recently, which is another important factor. Traders fret that the Eurozone economy is vulnerable to a Russian retaliation if NATO puts sanctions on Russia for invading Ukraine, including potential disruptions to gas imports. For the most part, ECB speak from the likes of Spain’s Pablo de Cos (who was dovish) and Ireland’s Philip Lane (who was neutral) has not shifted the dial for EUR/JPY on Thursday. Traders might expect the pair to test weekly lows near 130.00 if geopolitical tensions continue to escalate, with a break below opening the door to a potential run towards annual lows in the 128.00s.