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DailyFX Top Trade this Week – EURJPY A Conduit for Ukraine Standoff

EURJPY, Volatility and Ukraine Talking Points

  • EURJPY is trading in the middle of its broad 134 to 127.50 range with the highest 20-day ATR (volatility) in 17 months heading into a troubling week
  • Top fundamental concern for this pair is the bearings for ‘risk trends’ as the West warns that Russia is prepared to invade Ukraine
  • Should Russia cross the border, the tension in the financial system will ramp up owing to serious uncertainty, but targeted sanctions would hold particular risk for the Euro

Global interest in the situation along Ukraine’s border with Russia hasn’t been restricted to those that only follow geopolitical headlines for personal interest. The matter is of exceptional relevance to market participants. We have seen the balance of risk trends waver across the financial system over the past few months through a few different touch points – mainly monetary policy – but this particular front represents a situation with potentially severe consequences. Should Russian forces invade Ukraine, the West will has vowed it will respond with measures. Thus far the threat has not been one of a military response, which could readily escalate to a global war with extreme results; but sanctions are designed to produce a significant economic impact. In general, catalyzing this event would very likely lead to meaningful risk aversion across the financial system. In the FX market, the Yen crosses are particularly sensitive to such ‘risk on and risk off’ matters. However, I believe the EURJPY is even more distinctly exposed to sentiment driven by this type of event given the type of sanctions that would be employed to penalize Russia.

Chart of EURJPY with 100-Day Moving Average (Daily)

This past week, sensing the situation was escalating, we witnessed a number of European leaders come out on the global political stage to warn that sanctions that could be used to respond to Russia should hurt their economy more than Europe itself. Key to that worry is the export of natural gas from Russia to Europe which represents an enormous source of power for the continent. Leaders such as US President Biden no doubt register the call, but there are not many alternative targets that would have nearly as much bite to exact an economic toll on the country. If this situation devolves and an invasion occurs, all the Yen crosses would likely slide. Should sanctions result in a cut off of natural gas imports, the impact on EURJPY would be proportionately greater. And, should sentiment falter for some other reason, we would still likely see this pair drop. Technically speaking, this cross in the middle of a large technical range over the past year – from 134 at the top end down to approximately 127.50. Meanwhile, the volatility level of the pair as measured by the 20-day ATR is the highest seen since September 2020. Volatility seems probable one way or the other.

Chart of EURJPY with 100-Week Moving Average (Weekly)

While we stand on the cusp of a swell in activity levels, the EURJPY’s big picture should be firmly in the back of traders minds. On a higher time frame chart, we see a far larger technical pattern take shape: a multi-year wedge that has controlled major legs of trends back to 2008. A break to the upside (above 134) could open up a significant move, but that would insinuate a serious uplift in appeal and potential for the Euro going forward. Short of the ECB joining the Fed in front-loaded rate hikes, that seems very improbable. Alternatively, a natural ebb in risk trends that pushes us below 127.50 looks something like a ‘path of least resistance’ move back into a larger range that stretches down to around 120. Meanwhile, retail FX traders at IG seem to be treating this in a time frame that is even shorter than the daily chart. Expectations of switch back seem clear, but that is likely to intensify as we move to the borders of the 134 – 127.50 range. At that point, retail traders tend to follow technical reads rather than follow systemic event risk, so be mindful of this indicator’s ability to indicate market intent.

Retail FX Positioning of IG Clients in EURJPY (Daily)

This information has been prepared by IG, a trading name of IG US LLC. This material does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. You should not treat any opinion expressed in this material as a specific inducement to make any investment or follow any strategy, but only as an expression of opinion. This material does not consider your investment objectives, financial situation or needs and is not intended as recommendations appropriate for you. No representation or warranty is given as to the accuracy or completeness of the above information. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. Any research provided should be considered as promotional and was prepared in accordance with CFTC 1.71 and designed to promote the independence of investment research. See our Summary Conflicts Policy, available on our website.

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