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EUR/JPY. Passions around Ukraine: the yen skims the cream

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Trading dollar pairs is risky today: the results of the January Federal Reserve meeting may redraw the fundamental picture, strengthening or weakening the position of the US currency. Moreover, we should not forget about the risks of false price movements, especially in the short period of time between the publication of the final communique and the press conference of Fed Chairman Jerome Powell.

Therefore, it is advisable to stay out of the market for the next half-day, given the high degree of uncertainty. Or take a closer look at the main cross-pairs that are not affected by the greenback. Among the key crosses, the EUR/JPY pair can be distinguished: there is a pronounced downward trend here, which is due not only to the strengthening of the yen, but also to the weakening of the single currency. Such a “tandem” has led to the fact that the pair has decreased by almost 300 points over the past week.

As you know, the Japanese currency is a safe haven instrument, so the growth of anti-risk sentiment has significantly strengthened the yen’s position against the basket of major currencies – even the USD/JPY pair has been actively resisting the onslaught of dollar bulls in recent days. In other words, the yen now has its own resources for independent growth, and paired with the euro, the currency clearly dominates. However, not only paired with the single currency – for example, paired with the pound, the yen has also strengthened its position by almost 500 points since mid-January.

The growth of anti-risk sentiment in the markets is due to the escalation of tensions between Russia and Ukraine. To be more precise, the financial world is more concerned about the global prospects of the conflict. After all, all the previous events that took place earlier in the East of Ukraine were ignored by the market: traders of the foreign exchange market did not take into account the local, in their opinion, conflict.

However, now the situation has acquired a larger scale – primarily in the context of information “pumping” by the Western media and top politicians in Europe and the United States. There is a rather paradoxical situation when the top officials of Ukraine and Russia deny preparations for military escalation, and the front pages of influential publications convince their readers of the opposite. For example, the President of Ukraine said this week that “there are no reasons for any panic, everything is under control.” The Secretary of the National Security and Defense Council of Ukraine also urged Ukrainians to remain calm. At the same time, he stressed that he does not see the possibility for a full-scale Russian offensive on Ukraine. In turn, the Ukrainian Defense Minister said yesterday that at the moment the Russian armed forces “have not created a single strike group that would indicate planning an invasion of Ukraine.”

And although representatives of the Ukrainian side do not exclude negative scenarios, their rhetoric differs from the rhetoric of many Western politicians and those in power. For example, the head of the British government, Boris Johnson, said the day before yesterday that Moscow was preparing an “attack on Kiev.” Referring to British intelligence data, he said that there are allegedly 60 Russian combat groups on the border of Ukraine with “a plan for a lightning war that can capture the country’s capital.” Prior to that, information appeared in the American press that the largest Ukrainian city of Kharkiv could be occupied in the near future.

Against the background of such reports, it became known about the evacuation of relatives of employees of the US Embassy in Kiev. Then the UK, Australia and Germany announced the recall of their diplomatic staff from Ukraine.

At the same time, the information background is “fueled” by militaristic statements and/or decisions. In particular, the head of Belarus Alexander Lukashenko promised to deploy “a whole contingent of the Belarusian army” on the border with Ukraine. This statement was made against the background of preparations for the joint military exercises “Allied Resolve-2022” with the Russian Federation, which will begin on February 10.

In turn, a number of NATO member countries have announced the deployment of forces in Eastern Europe. For example, Spain will send warships to the Black and Mediterranean Seas, and fighters to Bulgaria. Denmark has already sent a frigate to the Baltic Sea and four F-16 fighters to Lithuania, the Netherlands is transferring two F-35 fighters to Bulgaria, France has expressed readiness to send troops to Romania, and the United States is considering increasing its military presence in eastern Europe. In particular, a Pentagon spokesman said the day before yesterday that about 8,500 American troops were put on high alert to support the NATO response force and in case of other emergencies.

In other words, the prevailing fundamental background contributes to the strengthening of anti-risk sentiment in the market due to an increase in geopolitical risks. Shares of global companies began to actively lose their market value, while protective assets began to be in high demand. The beneficiary of the current situation in the context of the EUR/JPY cross-pair was the yen.

It can be assumed that the pair’s downward trend has not yet exhausted itself, since the conflict situation is still far from de-escalation. For example, today it became known that the United States has prepared, but has not yet transmitted to Russia its response to the request for “security guarantees”. In addition, the foreign ministers of the United States and the Russian Federation recently announced that they would continue negotiations, but only after the United States had submitted written responses to Russia’s demands.

Thus, the unpredictable situation around Ukraine creates the basis for further development of the EUR/JPY downward trend. It is advisable to use any upward pullbacks on the pair to open short positions. The same is said by the technical side of the issue. The cross-pair on the daily chart is located between the middle and lower lines of the Bollinger Bands indicator, as well as on the lower border of the Kumo cloud (128.70). If the bears are able to settle below this target, we can consider short positions with the first target of 128.40 (the lower line of the Bollinger Bands on D1) and the main target of 127.80 – the lower boundary of the Kumo cloud on the W1 timeframe.

*The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade.

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