EUR/JPY bounces off the 135.50 area

• EUR/JPY rallied to 135.50 as the yen suffered from rising yields and the euro benefited from strong EZ inflation.
• The ECB’s rhetoric was also noticeably more aggressive and as a result, short-term EUR/JPY bulls are expecting a retest of 137.00.

The EUR/JPY rallied into the 135.50 area on Friday as rising yields, particularly in the US, weighed on the rate-sensitive yen and positive rhetoric from Russia and Ukraine, hot euro zone inflation and aggressive comments from the ECB supported the euro. The pair, which touched lows in the 134.50 area during the Asian session, is now trading with daily gains of around 0.5% at 135.30. From a technical point of view, the recent price action is not particularly remarkable, with the pair simply oscillating within already well-established ranges this week.

With recent hot Eurozone inflation numbers and increasingly aggressive rhetoric from ECB members suggesting upside risks to Eurozone yields in the coming week (much attention will be focused on the release of ECB minutes on Thursday), many short-term bulls will expect Friday’s recovery to be the start of a longer lasting move towards this week’s highs in the 137.00 area. Geopolitical developments could make or break EUR/JPY’s near-term bullish outlook, with market participants waiting with bated breath to hear how Friday’s virtual Russia-Ukraine peace talks went.

Another geopolitical risk EUR/JPY traders should watch out for is the ongoing saga related to Russia’s demands for ruble payments for gas exports. Any signs that Russia might cut off gas to the eurozone would be very negative for the euro, as such an eventuality would quickly push the bloc’s economy into a deep recession amid energy rationing. It doesn’t look like things are heading that way at the moment, so EUR/JPY may hold a bullish bias for now.

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