EUR/JPY: Bulls riding USD weakness in slight risk-on sentiment

• EUR/JPY testing highs as risk-on markets prevail.
• There are, however, an underbelly of substantial downside risks.

EUR/JPY is trading at 123.88 between a tight range of between 123.73 and 123.93 while activity is centred around the US dollar crosses in the main. 

The climate is slightly risk-on, with Wall Street continuing to remain resilient despite the underbelly of risk-off themes, which include Sino/US tensions and second summer waves of the coronavirus. 

Stimulus hops in the US are helping to keep the bid on Wal Street alive as investors expect a solution by the end of this week.

Moreover, markets have been underpinned by positive growth signals in Europe and China and encouraging news on the COVID-19 vaccine front.

Besides government rescue packages, strong policy support from central banks also keeps spirits high and investors are in anticipation of an even more dovish Federal Reserve this week. 

EUR/USD has pushed a lot higher, moving above 1.16 on US virus headwinds and good news out of the euro area. So long as the USD remains under pressure, EUR/JPY can ride firm equities.

Firm equities will prevail all the while US and German bond yields continue to drift lower. 

Risks to the upside in the cross

Risks to the upside in the cross stem from more countries struggling with second COVID-19 waves this summer, despite the tentative signs the contagion is slowing in the worst-hit states, such as Florida, Arizona, California and Texas.

Several European countries have seen a flare-up in the number of new infections, especially Spain, Austria, Belgium and Croatia.

Moreover, there is no guarantee that the rescue package that has been agreed by the EU will sustain second waves of the virus. Going back to the drawing board would be heavily bearish for the euro and the cross. 

At the same time, US-China tensions flared up yet again after the US moved to close the Chinese consulate in Houston.The  Chinese retaliated last week by ordering a shutdown of the US Chengdu consulate.

Following some very tough speeches from US officials lately, it looks increasingly likely that the two powers are heading into a New Cold War which should favour both the yen and the greenback, weighing on the cross. 

EUR/JPY levels