The improved political landscape following Joe Biden's victory in the US presidential election, a new fiscal stimulus package from the US Congress, regulatory approval, and the massive introduction of COVID-19 vaccines have significantly improved global risk appetite. This contributed to the sell-off of safe-haven assets and turned the Japanese yen into one of the outsiders in the Forex market. However, the yen still welcomed 2021 in a cheerful mood, which is facilitated by increased demand for Asian assets and fears that the degree of political risks in the United States may increase.

Strong statistics on business activity in China and the strengthening of the yuan against the US dollar to the highest level since mid-2018 outweighed fears about the introduction of a state of emergency in Tokyo due to the growing number of people infected with coronavirus. According to Bloomberg estimates, each month of quarantine in Tokyo will cost Japanese GDP 0.7%. BNP Paribas expects the economy to shrink by 5% at the end of the first quarter and by 10% if a state of emergency is declared across the country. Separately, Tokyo is among the TOP 10 largest economies in the world, so it is not surprising that a lockdown in one city promises huge losses for the entire state.

The largest economies in the world

However, investors have long been accustomed to the feedback between the state of Japan's GDP and the exchange rate of its currency. The worse the global economy is, the better the yen feels.

It may strengthen due to some deterioration in global risk appetite in connection with the events taking place in the United States. On January 5, the Senate runoff election is expected. A lot will depend on who exactly takes the two remaining vacant seats. If the Democrats win, we expect a "blue wave" and an expansion of fiscal stimulus, which will deal another blow to safe-haven assets. If at least one of the seats goes to the Republicans, they will continue to control the Senate and put a spoke in the wheels of Joe Biden. In this scenario, the quotes of EUR/USD and EUR/JPY risk falling.

On January 6, the minutes of the Fed's December meeting will become public, and Congress will count the electoral votes and announce the winner of the US presidential election. On January 8, the report on the state of the US labor market for December will be published. Employment growth is expected to slow from 245,000 to 100,000, while unemployment is expected to rise from 6.7% to 6.8%, which will be good news for the dollar and yen. It is unlikely that it makes sense to play these events in the USDJPY pair. Both of its member currencies are safe-haven assets, so a change in global risk appetite will not particularly affect the pair. It is best to pay attention to AUD/JPY or EUR/JPY.

Technically, on the daily chart of EUR/JPY, there is a consolidation in the range of 125.7-127.2. A break of its upper limit followed by a successful assault on the resistance at 127.65 will allow you to form longs with a target of 161.8% according to the AB=CD pattern. On the contrary, a successful test of support at 125.7 will create prerequisites for short-term sales in the direction of at least 124.9 and 124.35.

EUR/JPY daily chart