EUR / JPY rallies on Monday, but capped at 128.00 by a medium-term downtrend

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  • EUR / JPY rallied 0.4% on Monday, but was capped at 128.00 due to a key downtrend.
  • The pair was supported by a rebound in risk appetite overall due to more positive news on Omicron.
  • But technicians point out that the EUR / JPY has formed a descending triangle in recent sessions, which could indicate a bearish breakout.

EUR / JPY rallied on Monday to test a key downtrend that has been limiting price action since early November. The downtrend has been providing resistance near the 128.00 level and has been limiting price action so far in the session. On the day, the pair was up 0.4%.

The EUR / JPY has been held back in recent sessions by concerns about the implications that the appearance of Ómicron will have on the global economic landscape. This compounded concerns about the short-term economic outlook for the euro zone, which is already suffering from an unprecedented surge in Covid-19 (delta) infections that has seen countries move to reimpose various lockdown / health restrictions.

But the tone of the news since the weekend has been more optimistic in Ómicron. As more anecdotal data / evidence emerges from South Africa, momentum is building behind the idea that the new variant is much smoother than past variants such as delta. Over the weekend, the top US exporter of infectious diseases, Anthony Fauci, said on CNN that it does not appear that Ómicron has a “great degree of severity.”

The change in the tone of the news has helped support a widespread improvement in risk appetite on Monday that is helping equity markets, global commodities and risk-sensitive currencies. Similarly, demand for safe-haven currencies like the yen has been undermined, so the EUR / JPY has been able to rebound.

If the tone of the news continues to improve, the pair could break north of its recent downtrend, which could open the door for a run towards key resistance at the 128.80 area and then above that in the area of 129.50. However, technical indicators will note that the EUR / JPY has formed a descending triangle in recent sessions, with support at the 127.50 area. These patterns are usually a sign that a bearish breakout is coming. A break below the key 127.50 zone could open the door for an extension of losses to the next significant support zone around 125.10.

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