- EUR/JPY bounced back from sub-1.2800 lows on Friday to trade in the 128.30 area.
- Pandemic uncertainty is keeping the pair under pressure, as focus turns to next week’s ECB meeting.
EUR/JPY bounced back from sub-1.2800 lows on Friday to trade in the 128.30 area. The pair looks on course to end the week about 0.6% higher, having found solid support in the 127.50 area earlier in the week. EUR/JPY was at one point on Wednesday above 129.00, meaning that over the course of the last two days it has given back 50% of its weekly gains. A similar trend has been witnessed across JPY crosses, they continue to struggle to recovery to pre-Omicron levels. For EUR/JPY, that was above 129.00.
Why could this be the case? The uncertainty is far from over. Yes, it seems as though Omicron is much milder than delta. But there has also been plenty of evidence this week to suggest that it is significantly more transmissible (a Japanese study put it at 4.2 times more transmissible). That means that even if its infection to hospitalisation rate is (for example) five times lower than with the delta variant if it spreads to enough people simultaneously thanks to its high transmissibility, hospitals could still be overwhelmed. That means governments may still be inclined to tighten lockdowns as infection rates rise in the coming weeks and they will rise significantly. Many already are (most notably the UK government implementing its Covid-19 “Plan B”).
Thus, it remains difficult to predict how economic growth will progress over the coming quarter in Europe and elsewhere and this naturally favours the safe-haven yen. Despite elevated pandemic uncertainty, the ECB seems intent on ending its pandemic era emergency QE programme in March as planned, though sources this week indicated it may temporarily increase its pre-pandemic QE programme to ease rate of the decline in purchases so as to avoid any disorderly conditions in markets. Next week’s ECB meeting should shed light on its QE plans. For now, EUR/JPY will likely trade within recently established 127.50-129.00 ranges as uncertainty clears up.