EUR/JPY remains depressed near 165.70, bulls have the upper hand while above 200-day SMA

• EUR/JPY meets with some supply on Thursday as JPY benefits from intervention fears.
• The BoJ rate hike uncertainty and the risk-on mood cap gains for the safe-haven JPY.
• Bets for less aggressive ECB rate cuts lend some support to the Euro and the cross.

The EUR/JPY cross struggles to capitalize on the previous day's goodish bounce from levels just below the 165.00 psychological mark and attracts fresh sellers on Thursday. Spot prices remain depressed through the first half of the European session and currently trade around the 165.70-165.65 area, though lack follow-through and remain confined in a familiar range held over the past week or so. 

Wednesday's surge in the USD/JPY pair, triggered by Donald Trump's victory in the US election, prompted verbal intervention by Japanese authorities. This leads to some unwinding of the bearish positions around the Japanese Yen (JPY), which, in turn, is seen exerting downward pressure on the EUR/JPY cross. That said, the uncertainty over the Bank of Japan's (BoJ) rate-hike plan keeps a lid on any meaningful appreciating move for the JPY.

Investors seem convinced that Japan's political landscape could make it difficult for the BoJ to tighten its monetary policy further. Moreover, government data released this Thursday showed that Japan's inflation-adjusted wages fell for the second straight month in September, raising doubts about how soon the BoJ could raise rates again. This, along with the risk-on mood, caps the upside for the safe-haven JPY and offers support to the EUR/JPY cross. 

The shared currency, on the other hand, draws support from bets for a less dovish European Central Bank (ECB). In fact, data released last week showed that inflation in the Eurozone rose to 2% in October. This, along with the better-than-expected GDP growth figures from the Eurozone's largest economies, suggests that the ECB will stick to a 25 basis points (bps) rate cut at the December meeting and helps limit the downside for the EUR/JPY cross.

Even from a technical perspective, the range-bound price action might still be categorized as a bullish consolidation phase on the back of the recent breakout above the very important 200-day Simple Moving Average (SMA). This, in turn, suggests that the path of least resistance for the EUR/JPY cross is to the upside. Hence, any subsequent decline might still be seen as a buying opportunity and is more likely to remain cushioned.

Bank of Japan FAQs

What is the Bank of Japan?

The Bank of Japan (BoJ) is the Japanese central bank, which sets monetary policy in the country. Its mandate is to issue banknotes and carry out currency and monetary control to ensure price stability, which means an inflation target of around 2%.

What has been the Bank of Japan’s policy?

The Bank of Japan embarked in an ultra-loose monetary policy in 2013 in order to stimulate the economy and fuel inflation amid a low-inflationary environment. The bank’s policy is based on Quantitative and Qualitative Easing (QQE), or printing notes to buy assets such as government or corporate bonds to provide liquidity. In 2016, the bank doubled down on its strategy and further loosened policy by first introducing negative interest rates and then directly controlling the yield of its 10-year government bonds. In March 2024, the BoJ lifted interest rates, effectively retreating from the ultra-loose monetary policy stance.

How do Bank of Japan’s decisions influence the Japanese Yen?

The Bank’s massive stimulus caused the Yen to depreciate against its main currency peers. This process exacerbated in 2022 and 2023 due to an increasing policy divergence between the Bank of Japan and other main central banks, which opted to increase interest rates sharply to fight decades-high levels of inflation. The BoJ’s policy led to a widening differential with other currencies, dragging down the value of the Yen. This trend partly reversed in 2024, when the BoJ decided to abandon its ultra-loose policy stance.

Why did the Bank of Japan decide to start unwinding its ultra-loose policy?

A weaker Yen and the spike in global energy prices led to an increase in Japanese inflation, which exceeded the BoJ’s 2% target. The prospect of rising salaries in the country – a key element fuelling inflation – also contributed to the move.

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