EUR/JPY cautious above 126.00 as euro traders eye incoming key events

• EUR/JPY remains supported above 126.00 on Tuesday, amid subdued trade as traders eye key risk events later in the week.
• Euro traders await Thursday’s ECB meeting and developments on Brexit and the EU recovery fund ahead of the EU summit.

EUR/JPY trades with marginal gains on Tuesday and has remained generally well supported above the 126.00 level. Price action has been quiet tame, in fitting with a broader feeling of caution elsewhere in FX markets ahead of key risk events later in the week.

EUR traders await super Thursday

Thursday will be big for the euro. Firstly, the ECB are set to deliver a significant easing package, which most expect will amount to a (roughly) EUR 500B top up to the Pandemic Emergency Purchase Programme, which will allow purchases to continue for many more months (rather than the ECB increasing the monthly rate of purchases). Meanwhile, the bank is expected to also extend its targeted longer-term refinancing operations (TLTROs), and perhaps make them more accommodative. The key here (as a few ECB governing council members have explained recently) is to extend the duration of accommodative financial conditions to further assist the recovery in 2021 and beyond, rather than making financial conditions right now more accommodative.

Amid the recent improvement in global financial market conditions since Joe Biden won the US Presidential election and positive vaccine news in early November (despite the worsening state of the global Covid-19 pandemic as the North Hemisphere enters winter), the pressure on the ECB to over-deliver on market expectations has been lessened. Indeed, many analysts now see the risk of under-delivery as being higher than the risk of over, meaning the risks to EUR might lay somewhat tilted to the upside. Moreover, while the ECB is likely to take issue with recent EUR appreciation vs USD, the trade-weighted EUR is not as strong (still below summer highs), so any attempts to jawbone EUR lower might be taken with a pinch of salt.

However, perhaps the more important event of the day for EUR will be the Summit of EU27 Leaders, which begins on Thursday and goes into Friday. Top of the agenda will of course be the issue of Brexit (can UK PM Boris Johnson and EU Commission President von der Leyen thrash out a deal when they meet on Wednesday in time for the summit?).

Elsewhere, the Polish/Hungarian veto against the EU Recovery Fund and 2021-2027 Budget will also be a hot topic. On Tuesday, a Polish government spokesperson said that Poland & Hungary are to “maintain their approach” to EU budgetary talks. However, Hungarian PM Orban later said that there is a good chance of a deal.

If a deal cannot be agreed with Hungary and Poland regarding the rule of law attachments being added to access to funding then EU officials have already threatened that they will go with “plan B”, which essentially could mean an EU-minus Poland and Hungary fiscal package. Poland and Hungary were set to be big net beneficiaries of the EU’s next-generation fiscal package, so time will tell if they cave into the pressure.

In terms of how EUR/JPY might react to events; should the UK PM Boris Johnson and EU Commission President von der Leyen manage to pull a rabbit out of a hat and reach an agreement prior to the EU summit, this will undoubtedly be a positive for EUR (in tandem with GBP) and negative for JPY (as risk appetite improves), meaning upside for EUR/JPY. Meanwhile, if the EU does manage to forge an agreement on the recovery fund and budget with Poland and Hungary (something markets do not expect at this point), this could further add to upside. Conversely, even if Brexit and EU recovery fund and budget talks again fail, the cross is unlikely to be too impacted as long as broader risk appetite remains underpinned.

EUR/JPY has clean air to both the upside and downside

EUR/JPY current trades right in the middle of what appears to be a technical vacuum, i.e. an area relatively devoid of significant levels of support and resistance. The pair currently trades within a bullish flag and (if things go well for EUR fundamentally this week) may soon break this flag to the upside and move to the north to challenge the September high just above 127.00. Conversely, if bearish momentum gains further momentum, the pair could slide back towards a significant area of support just above 125.000 (the 9 October, 9 and 30 November highs).

EUR/JPY six hour chart