EUR / JPY Cautious Above 126.00 As Euro Traders Watch For Upcoming Key Events

• EUR / JPY remains supported above 126.00 Tuesday amid dovish trade as traders watch for key risk events later in the week.
• Euro traders await Thursday’s ECB meeting and developments on Brexit and the EU recovery fund ahead of the EU summit.

The EUR/JPY it is trading modestly on Tuesday and has generally held well above the 126.00 level. Price action has been quiet, in line with broader sentiment of caution elsewhere in the forex markets ahead of key risk events later in the week.

EUR Traders Await Super-Thursday

Thursday will be great for the euro. First, the ECB is poised to deliver a significant easing package, which most expect to amount to (approximately) EUR500B as a complement to the Pandemic Emergency Purchase Program, which will allow purchases to continue for many more months (in instead of the ECB increasing the monthly purchase rate). Meanwhile, the bank is also expected to extend its longer-term refinancing operations (TLTRO) and perhaps make them more accommodative. The key here (as some members of the ECB’s governing council have recently explained) is to extend the duration of accommodative financial conditions to further aid the recovery in 2021 and beyond, rather than making financial conditions right now be more accommodating.

Amid the recent improvement in global financial market conditions since Joe Biden won the US presidential election and positive news about vaccines in early November (despite the worsening state of the global Covid pandemic- 19 as the Northern Hemisphere enters winter), pressure on the ECB to over-meet market expectations has been reduced. In fact, many analysts now view the risk of underdelivery as greater than the risk of overshoot, which means that the risks to the EUR could skew up a bit. Also, while the ECB is likely to oppose the recent appreciation of the EUR against the USD, the trade-weighted EUR is not that strong (still below its summer highs), so any attempt to lower the EUR could be taken with caution.

However, perhaps the biggest event of the day for the EUR is the EU27 Leaders Summit, which starts on Thursday and ends on Friday. The main topic on the agenda will, of course, be Brexit (can British Prime Minister Boris Johnson and EU Commission President von der Leyen reach a deal when they meet on Wednesday in time for the summit? ?).

Elsewhere, the Polish / Hungarian veto against the EU Recovery Fund and the 2021-2027 Budget will also be a hot topic. On Tuesday, a Polish government spokesman said Poland and Hungary must “maintain their focus” on the EU budget talks. However, Hungarian Prime Minister Orban later said that there is a good chance of reaching an agreement.

In terms of how the EUR / JPY could react to events; If British Prime Minister Boris Johnson and EU Commission President von der Leyen manage to pull a rabbit out of a hat and reach an agreement before the EU summit, this will undoubtedly be positive for the EUR (along with GBP) and negative for JPY. (as risk appetite improves), which means EUR / JPY bullish. Meanwhile, if the EU manages to forge a budget and recovery fund deal with Poland and Hungary (something the markets are not expecting at the moment), this could increase further. On the contrary, even if talks about Brexit and the EU recovery fund and budget fail again, the crossing is unlikely to be affected too much as long as a broader risk appetite is maintained.

EUR / JPY has clean air on both the up and down

The EUR / JPY pair is trading in the middle of what appears to be a technical gap, that is, an area relatively devoid of significant levels of support and resistance. The pair is currently trading within a bullish pennant and (if things are going well for the EUR fundamentally this week) it may soon break this flag to the upside and move north to challenge the September high just above 127.00. Conversely, if bearish momentum gains more momentum, the pair could fall towards a significant support area just above 125,000 (the highs of October 9, November 9 and 30).