EUR/JPY falls back to mid-127.00s amid technical resistance, despite hawkish ECB

• A more risk-off market mood plus significant resistance in the upper 128.00s saw EUR/JPY eventually pull back towards 127.50.
• A hawkish ECB meeting failed to offer the euro a lasting lift, with bears eyeing weekly lows in the 124.00s.

As markets adopted more of a risk-off mood on Thursday, with global equities paring some of Wednesday’s outsized gains amid ongoing concerns about the ongoing Ukraine conflict and its potentially stagflationary global economic impact, EUR/JPY also came under pressure. The pair came within a few pips of hitting the 129.00 level earlier in the day, but has since pulled back to the 128.50 area where it trades down about 0.6%. A surprisingly hawkish ECB monetary policy decision where the bank announced an end to net asset purchases some time in Q3, a more hawkish timeline than many had expected given uncertainties related to the Ukraine war, momentarily supported the euro.

This euro strength didn’t last, perhaps given Lagarde’s reluctance to talk rate hikes, or perhaps with markets taking a more sanguine view on the prospect for long-term monetary tightening amid possible stagflation in the months ahead. The ECB’s latest GDP forecast (a big 2022 GDP growth view downgrade and a bigger HICP inflation view upgrade) won’t exactly inspire confidence regarding the stagflation chatter. Technicians also got excited about a bearish technical setup that has come into fruition nicely. After crashing below a long-term support trendline in early March, it took until this Thursday for the pair to retrace and test the support line once more.

The trendline (now resistance) coincided perfectly with daily highs and bearish technicians have taken this as bearish signal. Should the downturn in risk appetite extend in the coming sessions (very possible if there continues to be little progress in Russo-Ukraine talks and commodities keep rising), many will now be targeting a test of recent lows in the 124.40s.