EUR/JPY: bulls seeking a break of the 10-hr SMA but political angst keeps a firm lid on

• European politics sends the euro to multi-month lows and the cross struggles back above the 10-hr SMA on a correction.
• EUR/JPY makes a fresh low for 2018 in thin trade.  

EUR/JPY was a mover on Monday, falling from the initial bullish spike highs of 128.53 to a low of 126.85 on Monday in thin liquidity with both the UK and US out on holiday.

European politics have taken up the driving seat for markets once again with the euro getting slammed as sentiment switches to negative. With the yen catching a safe haven bid as well, the downside was amplified through the cross.  

So what’s going on?

First of all, Spanish politics has kicked up more political blues, joining Italy in becoming a huge political headache for the European Union. Spain looks to be moving to imminent elections after a no-confidence motion that rocked the Madrid establishment, pulling the eurozone into a fresh crisis.  The Prime Minister, Mr Rajoy, has now warned that the political instability will wreak havoc on Spain’s fragile economic recovery following claims over illegal payments from a slush fund run by the Popular Party’s ex-treasurer, Luis Barcenas. Meanwhile, in Italy, we are still no closer to a solution to the deadlock and political stalemate while the nation struggles to form a government.

Italy has been mired once again in political turmoil this week where the president is now facing impeachment after he vetoed a choice for finance minister. President Sergio Mattarella said there are too many dire implications for investors should he appoint the Eurosceptic Paolo Savona for the finance minister. President Mattarella warned on Sunday that the prospect of a populist government had worsened the spread between Italian and German 10-year government bond yields, seen as a key measure of risk. The decision has ended a bid by Italy’s two populist parties to form a coalition and this is likely to be dragged out through parliament to demand the president step down based on a simple majority vote. Then, if the vote is in favour, the country’s constitutional court will decide whether to impeach or not.

EUR/JPY levels

Capped by the initial resistance at 131.38, the 14th May high, EUR/JPY has sold off sharply and has charted new lows for the year of 126.85, confirmed by the daily RSI dipping below the 30 level on the daily sticks. Initial target is the 21-month SMA at 126.27 ahead of 50% retracement at 126.18 50% retracement. On the flipside, 129.22/50 guards a run to 130.20. However, a breach of 131.38 opens the rising weekly 50 SMA ahead of the descending 21-W SMA at 131.87.