EUR/JPY rallies back above 131.00 as risk appetite improves as Powell sticks to the script

• EUR/JPY recovered back above 131.00 on Tuesday and is testing a key bullish trend channel that it broke below on Monday.
• The pair was supported as risk appetite improved after Powell refrained from offering further hawkish Fed surprises.

Strength in risk assets on Tuesday after Fed Chair Jerome Powell refrained from giving markets any further price in Fed tightening in 2022 weighed on the safe-haven yen and helped catapult EUR/JPY back above 131.00. Powell, who testified at a Senate hearing for his renomination as Fed Chair, stuck to the script and reiterated the main takeaways from last week’s hawkish Fed minutes. This was taken as a green light by US equity investors to continue buying the recent dip helped to also spur strength in commodities and US bonds. This prompted currency markets to adopt a distinctly risk-on posture, with risk-sensitive G10 currencies (NOK, SEK, CAD and AUD for example) to outperform whilst the US dollar and yen underperformed.

As a result, EUR/JPY has been able to recapture the lion’s share of Monday’s losses that sent it as low as the 130.10s and saw the pair close under 130.50. As noted, the pair has been able to rally all the way from Tuesday’s opening levels all the way under 130.50 to current levels above 131.00, a near-0.5% rally on the day. The pair is now retesting the upwards trend channel that it broke to the south of at the start of the week. Whilst EUR/JPY traders would do well to keep an eye on Eurozone November Industrial Production data out on Wednesday, Japanese Machine Orders on Thursday and December PPI numbers on Friday risk appetite will remain the main driver of the pair.

More specifically, with markets now expecting decisive policy tightening from the Fed in 2022 to the tune of four rate hikes and the start to quantitative tightening, the question is whether US equities can weather whats seems likely inevitably higher yields. US December Consumer Price Inflation and Retail Sales data, more Fedspeak from regional Federal Reserve Bank Presidents and a Fed Vice Chair nomination hearing for Fed’s Lael Brainard will all be worth watching as potential catalysts. If US data/Fed rhetoric this week suggests recent hawkish Fed bets have been on the excessive side, recent gains in US tech stocks and downside in yields may continue, which may support further upside for EUR/JPY. Bulls would be eyeing a retest of recent highs in the 131.50s area.