EUR/JPY Sharply Reverses As European Stocks, Yields Drop

Risk-off flows in European equities coupled with downside in Eurozone yields weighed heavily on EUR/JPY on Thursday. The pair was last trading down 1.0% in the 154.50 area, a sharp reversal from intra-day highs closer to 157.00.

A sharp drop in Eurozone yields coupled with downside in major European equity bourses amid rising EU/Russia energy-related tensions dampened the appeal of the euro on Thursday, with the single currency amongst the worst performing currencies in the G10.

While the euro’s losses against its major currency peers were broad, they were most acute against the rate-differential sensitive/safe-haven Japanese yen. As a result, EUR/JPY slumped roughly 1.0% on Thursday, its worst one-day performance since 4 March. That saw the pair drop all the way back from intra-day highs in the upper 156.00s to the mid-154.00s.

At current levels near 154.50, the pair now trades just 0.3% above key support in the form of the 2021 highs at 154.12.

If EU-Russian economic tensions on energy continue to ramp up into the end of the week (could Russia start blocking gas flows into the EU?), then the pair might well extend on the recent bearish move that has already seen it pullback over 2.0% from earlier weekly highs around 137.50.

A break below 154.12 support would open the door to a push lower towards support in the 153.50 and 153.00 areas. Big upside surprises in the preliminary Spanish, French and German HICP inflation estimates for March over the past two days have done little to halt the euro’s downside reversal, with the pair instead taking its cue from the aforementioned movements in yields and risk appetite.

As things stand, the current inflationary environment of the Eurozone suggests that the euro is set to maintain a sizeable monetary policy divergence advantage over the yen.

That was a key factor lifting the pair as of late, but as economic uncertainty in the Eurozone continues to grow as a result of the Russo-Ukraine war, it’s difficult to be certain that the ECB will stick by its current policy guidance (of QE ending in Q3 and rate hikes in Q4).

Unless geopolitical uncertainty clears a little, this is likely to keep a lid on any EUR/JPY rebound.