EUR/JPY retreats from weekly top, eyes 161.00 mark amid reviving JPY demand

• EUR/JPY attracts some sellers on Friday and reverses a part of its recent gains to the weekly top.
• A combination of factors revives the JPY demand and exerts downward pressure on the cross. 
• Dovish ECB bets contribute to the fall, though the BoJ rate hike uncertainty might limit losses.

The EUR/JPY cross meets with some supply during the Asian session on Friday and for now, seems to have snapped a two-day winning streak to the weekly peak, around mid-162.00s touched the previous day. The downfall is sponsored by the emergence of some buying around the Japanese Yen (JPY) and drags spot prices to the 161.20 area, or a fresh daily low in the last hour.

Asahi Noguchi, a dovish Bank of Japan (BoJ) board member said on Thursday that the central bank has scope to raise interest rates further but must move cautiously and slowly to avoid hurting the economy. This comes on top of a further escalation of geopolitical tensions in the Middle East and the risk of a full-out war, which drives some flows towards the safe-haven JPY and turns out to be a key factor weighing on the EUR/JPY cross. 

The shared currency, on the other hand, remains depressed amid bets that the European Central Bank (ECB) will cut rates again in October on the back of easing inflationary pressures and economic slowdown. In fact, data released earlier this week showed that the Eurozone inflation fell to 1.8% in September, below the ECB's 2% target. This contributes to the offered tone surrounding the EUR/JPY cross and supports prospects for further losses. 

That said, the uncertainty over future interest rate hikes by the BoJ might hold back the JPY bulls from placing aggressive bets and help limit the downside for the currency pair. Japan's new Prime Minister Shigeru Ishiba said earlier this week that Japan is not in an environment for an additional rate increase. Moreover, Japan's Economy Minister Ryosei Akazawa stated that the PM and the BoJ both agree that overcoming deflation is Japan's highest priority.

The aforementioned mixed fundamental backdrop warrants some caution for bearish traders and makes it prudent to wait for strong follow-through selling before positioning for any further depreciating move. From a technical perspective, the formation of a 'Death Cross' on the daily chart – the 50-day Simple Moving Average (SMA) crossing below the 200-day SMA – suggests that the path of least resistance for the EUR/JPY cross remains to the downside.

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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