EUR/JPY still supported above 126.00 amid positive risk appetite

• EUR/JPY has again found support at the 126.00 level and amid an improved risk appetite is currently trading in the 126.20s.
• If the Covid-19 situation materially worsens in the EU, however, a break lower is on the cards.

EUR/JPY slumped on Tuesday, with markets at the time feeling gloomy about the latest updates from Europe regarding the spread of a new, more transmissible variant of Covid-19 and safe-havens such as JPY and USD outperforming the likes of the euro. But the pair has remained broadly supported at the 1.2600 level, and has turned a little higher on Wednesday as market focus shifts to Brexit; according to a deluge of reporting from UK and EU sources, a deal could be announced as soon as tonight.

Markets have responded in a risk on fashion to developments; stocks, bond yields, crude oil, industrial metals and precious metals are all higher and safe-havens including USD, CHF and JPY are softer, hence the gains being seen in EUR/JPY. At present, the pair trades higher by around 0.1% or just under 20 pips.

Covid-19 risks remain…

As far as EUR/JPY is concerned, downside risks are still significant given the risk of further negative developments on the Covid-19 front in the EU.

For example, recent announcements from the Irish Health Authorities have alarmed. The Covid-19 reproduction rate in the country is estimated to have surged 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 might 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 spikes in the R rate in any of these other EU countries likely implies the new UK variant is on the loose. This would almost certainly prompt tougher lockdown measures.

Remember also that the EU has lagged the UK significant with regards to approving the safety and efficacy of the Covid-19 vaccine; the UK had already given half a million Brits their first dose of the Pfizer/BioNTech vaccine. The EU has barely started.

EUR/JPY still in range

EUR/JPY has been rangebound for most of the month so far. However, in case there is a material worsening in the Covid-19 situation in the EU, EUR/JPY would be at risk of breaking below the 125.70ish-127.00 range that has prevailed since early December. The next key area of support to the downside around the 125.00 level, where the October and November highs reside, as well as the 200-day moving average.

EUR/JPY daily chart