EUR/JPY rallying towards 132.00, eyeing push towards annual highs as Eurozone bond yields hit multi-year highs

• EUR/JPY is pushing higher for a fifth successive session and is eyeing a test of 132.00.
• The pair’s more than 3.0% rally in the last five days comes as Eurozone bond yields push to multi-year highs.
• As long as geopolitical developments don’t deter the ECB from tightening in Q4, EUR/JPY has a shot at 2021 highs.

As Eurozone bond yields maintain their recent upwards trajectory to reflect recent more hawkish than expected policy announcements from both the ECB (last week) and Fed (this week), as well as an apparent realisation that the current inflationary environment will require higher longer-term interest rates, an ongoing widening of Eurozone/Japanese yield differentials continues to favour EUR/JPY. The pair is currently on course to post its fifth successive gain during which time it has rallied more than 3.0% from around 127.50 to current levels above 131.50. EUR/JPY bulls will be eyeing a test of the 132.00 level and a break above here could see the pair challenge earlier yearly highs above 133.00.

After EUR/JPY broke back above an important long-term trendline which has provided both support and resistance in recent weeks in the 129.00 area on Monday, technicians will likely not have been overly surprised to see the pair extend to the upside. Technicians have noted an important downtrend that links the Q2 2021, Q4 2021 and Q1 2022 highs as a key level to keep an eye on. It will likely offer substantial resistance in the upper 132.00s. Given that Eurozone bond yields are at multi-year highs (meaning EZ/Japan rate differentials are also at multi-year highs) some might interpret that as suggesting that there is plenty of room for further EUR/JPY upside in the near term.

A break above this long-term downtrend, as well as above the previous annual high just above 133.00 could open the door to a run towards 2021 highs above 134.00. As long as developments in the Russo-Ukraine war don’t deter the ECB from its current policy path of ending QE in Q3 and starting rate hikes in Q4, EUR/JPY may well maintain a medium-term upwards trajectory. That makes watching geopolitical developments of paramount importance for traders. The reporting on this topic has been mixed and conflicting, but there appears to be some momentum towards a peace deal being reached – if peace can be reached, that would only be bullish for EUR/JPY.