EUR/JPY clings to gains above mid-161.00s, over three-week top amid modest JPY weakness
- EUR/JPY attracts buyers for the third straight day and climbs to a multi-week top.
- A combination of factors undermines the JPY and lends some support to the cross.
- The divergent ECB-BoJ policy expectations warrant some caution for bullish traders.
The EUR/JPY cross gains positive traction for the third successive day and climbs to a three-and-half-week top during the first half of the European session on Thursday. Spot prices currently trade around the 161.55-161.60 region, up over 0.25% for the day, with bulls looking to build on the momentum beyond the 50-day Simple Moving Average (SMA) and
The Japanese Yen (JPY) is undermined by the political uncertainty in Japan, where the ruling Liberal Democratic Party (LDP) will elect its new president on Friday to replace outgoing Prime Minister Fumio Kishida. Apart from this, a generally positive tone around the equity markets is seen denting the JPY's relative safe-haven status and lending some support to the EUR/JPY cross.
The upside for the EUR/JPY cross, however, remains capped amid a modest pullback slide in the shared currency. This week's dismal Eurozone macro data bolstered the case for at least a 25 basis points (bps) interest rate cut by the European Central Bank (ECB) at its October meeting. This marks a big divergence in comparison to hawkish Bank of Japan (BoJ) expectations and caps the pair.
Investors seem convinced that the BoJ will hike interest rates again by the end of this year. The bets were reaffirmed by the BoJ meeting minutes released earlier today, showing that board members shared a view over the need for vigilance to the risk of inflation overshoot and that it was appropriate to adjust the degree of monetary support moderately. This warrants caution for the EUR/JPY bulls.
From a technical perspective, the 50-day Simple Moving Average (SMA) earlier this month crossed below the very important 200-day SMA, forming a bearish 'Death Cross' on the daily chart. This further makes it prudent to wait for strong follow-through buying before positioning for an extension of the EUR/JPY pair's recent upward trajectory witnessed over the past two weeks or so.
Japanese Yen FAQs
The Japanese Yen (JPY) is one of the world’s most traded currencies. Its value is broadly determined by the performance of the Japanese economy, but more specifically by the Bank of Japan’s policy, the differential between Japanese and US bond yields, or risk sentiment among traders, among other factors.
One of the Bank of Japan’s mandates is currency control, so its moves are key for the Yen. The BoJ has directly intervened in currency markets sometimes, generally to lower the value of the Yen, although it refrains from doing it often due to political concerns of its main trading partners. The current BoJ ultra-loose monetary policy, based on massive stimulus to the economy, has caused the Yen to depreciate against its main currency peers. This process has exacerbated more recently due to an increasing policy divergence between the Bank of Japan and other main central banks, which have opted to increase interest rates sharply to fight decades-high levels of inflation.
The BoJ’s stance of sticking to ultra-loose monetary policy has led to a widening policy divergence with other central banks, particularly with the US Federal Reserve. This supports a widening of the differential between the 10-year US and Japanese bonds, which favors the US Dollar against the Japanese Yen.
The Japanese Yen is often seen as a safe-haven investment. This means that in times of market stress, investors are more likely to put their money in the Japanese currency due to its supposed reliability and stability. Turbulent times are likely to strengthen the Yen’s value against other currencies seen as more risky to invest in.
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