UR/JPY rallies to one-week highs in 129.30s as risk appetite picks up

• EUR/JPY rallied to one-week highs in the 129.30s on Monday amid a broad uptick in macro risk appetite.
• The real test, from a technical perspective, will come when the pair hits the 129.50 balance area.

EUR/JPY saw a decent rebound on Monday, a function of a broad improvement in global risk appetite rather than broadly in line with expected Eurozone Q4 GDP and flash January inflation data. The pair rebounded from under 128.50 to jump back to the north of the 129.00 level and proceed to hit a one-week high in the 129.30s and also move above the 50-day moving average at 129.28. At current levels around 129.30, the pair trades with gains of 0.7% on the day, the best such one-day performance since early December.

From a technical perspective, the recent push into the 129.30s and to fresh one-week highs is a good sign for momentum this week, but the real test will come when EUR/JPY challenges the 129.50 area. This zone has been a key area of both resistance and support in the last few months. If traders expect the risk-off flows that dominated throughout most of January to be the dominant force in the coming months, then a retest of 129.50 might be seen an attractive entry point to reload on short positions.

Fundamentally speaking, one problem for that outlook is the fact that Eurozone/Japan rate differentials continue to move in the former’s favour as ever more ECB tightening is priced into the long-end of the Eurozone rate curve. The German 10-year on Monday hit its highest level since May 2019 at 0.03%, while the German 2-year broke out to its highest level since April 2019 at -0.525%. Focus this week will be on Thursday’s ECB meeting, which is not expected to deliver any policy changes.

Traders will be eagerly assessing whether the bank can add further fuel to the recent rise in Eurozone bond yields which has, so far, been primarily driven by the spillover impact of rising US yields. If so, that could EUR/JPY back towards 130. If this week’s US data and Fed speak spurs fresh hawkish Fed bets and further US bond yield upside, that might also help, as long as it doesn’t also trigger a sell-off in equities that spurs safe-haven yen demand.