EUR/JPY recovers from one-month lows in 127.20s, but negative trend persists

• EUR/JPY has recovered from 128.20 lows to the 128.75 area, but nonetheless trades lower as the recent negative bias continues.
• Many technicians, perhaps in anticipation of continued safe-haven yen demand, will be targetting a test of the December 127.50 lows.

Though the pair has recovered from its earlier session lows in the 128.20s back to the 128.75 area in more recent trade, and thus eroded the day’s losses to a mere 0.25% from as much as 0.6%, EUR/JPY’s negative bias continues. Indeed, EUR/JPY’s lows on Tuesday was a fresh more than one-month low and mark a sixth successive session where the pair has printed a lower low. After Monday’s more overtly defensive bias to FX market trade that saw the yen and euro alike perform well, the euro was an underperformer during Tuesday’s more mixed session.

That underperformance comes despite better-than-expected German Ifo figures released in the European morning, which as analysts have pointed out, was perhaps negated by pessimistic economic commentary from the economic institute. From a technical perspective, the fact that EUR/JPY hasn’t yet been able to muster a recovery back towards prior support now resistance in the 129.50 area, or back to test its 50-day moving average since dropping below it, is a bearish sign.

Many technicians, perhaps in anticipation of continued safe-haven yen demand as global risk appetite remains rocky amid central bank (Fed) tightening and geopolitical risks, will be targetting an eventual test of the December lows in the 127.50 area. It doesn’t seem likely that tensions between NATO/Ukraine/Russia in Eastern Europe will let up any time soon, though as long as war doesn’t break out imminently, there is a chance that markets get fatigued with the situation in the coming weeks.

That might mean central bank (Fed) tightening is the main threat to global risk appetite, meaning much of EUR/JPY’s near-term direction may be determined by Wednesday’s Fed event. For EUR/JPY to stabilise and recover back to earlier annual highs in the 131.00s, a broader recovery in risk appetite is going to be needed (with US equities recovering a decent portion of recently lost ground) and FX market focus is going to need to recalibrate on central bank policy divergence. Here the story could be a long-term EUR/JPY positive, with the Eurozone facing much higher upside inflation risks and, as a result, likely to remove monetary stimulus at a faster pace compared to Japan.