- EUR / JPY has again found support at the 126.00 level and amid enhanced risk appetite is currently trading at 126.20.
- However, if the Covid-19 situation materially worsens in the EU, a downside break is expected.
He EUR/JPY crashed on Tuesday, and markets at the time felt gloomy from the latest updates from Europe regarding the spread of a new, more transmittable variant of Covid-19 and safe havens like the JPY and USD outperforming the euro. But the pair has remained broadly supported at the 1.2600 level and turned slightly higher on Wednesday as the market’s focus shifts to Brexit; According to a flood of reports from UK and EU sources, a deal could be announced as soon as tonight.
The markets have responded in a risky way to the events; Stocks, bond yields, crude oil, industrial metals, and precious metals are all higher and safe havens including USD, CHF, and JPY are softer, so gains look in EUR / JPY. Currently, the pair is trading higher by around 0.1% or just under 20 pips.
Covid-19 risks remain …
As regards the EUR / JPY, downside risks remain significant given the risk of further negative developments on the Covid-19 front in the EU.
For example, recent announcements by the Irish health authorities have alarmed. The Covid-19 reproduction rate in the country is estimated to have risen to 1.5-1.8, its highest levels since March, with preliminary data suggesting that the new UK variant is present in the country.
This could serve as a canary in the coal mine for the rest of the EU; Cases of the UK variant have already been detected in Italy, Denmark and the Netherlands. Any sudden increase in the R rate in any of these other EU countries probably implies that the new UK variant is on the loose. This would almost certainly lead to stricter blocking measures.
Remember also that the EU has lagged far behind the UK when it comes to approving the safety and efficacy of the Covid-19 vaccine; the UK had already given half a million Britons their first dose of the Pfizer / BioNTech vaccine. The EU has only just started.
EUR / JPY still in range
The EUR / JPY has been in range for most of the month so far. However, in the event of a material deterioration in the Covid-19 situation in the EU, the EUR / JPY would risk breaking below the 125.70-127.00 range that has prevailed since early December. The next key support area on the downside is around the 125.00 level, where the October and November highs reside, as well as the 200-day moving average.
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