EUR/JPY returns to multi-week low and climbs back above 159.00 without a follow-through

• EUR/JPY attracts some buyers on Thursday amid modest decline in JPY.
• Divergent BoJ-ECB policy expectations keep a lid on any further upside.
• The cautious state of the market also calls for some caution for aggressive bulls.

The EUR/JPY cross is up modestly by more than 50 pips from the 158.70 region or a four-week low hit during the Asian session on Thursday, although it lacks a strong follow-on buy. Spot prices are currently trading around the 159.20-159.25 area and for now seem to have blocked this week’s pullback slide from the vicinity of the 163.00 round figure.

The emergence of some selling around the Japanese yen (JPY) is proving to be a key factor lending some support to the EUR/JPY cross, although the fundamental context calls for some caution before positioning for any further appreciation moves. That said, the divergent policy expectations of the Bank of Japan (BOJ) and the European Central Bank (ECB) should help limit losses in the JPY and keep a lid on the currency pair.

Markets were weighing on the possibility of another BoJ rate hike by the end of this year, and bets were reaffirmed by data showing that real wages in Japan rose for a second month in a row in July. Adding to this, BoJ Governing Council member Hajime Takata said we need to adjust monetary conditions by another notch if we can confirm that firms will continue to raise capital spending, wages and prices.

Instead, the ECB is almost certain to cut interest rates again in September as euro zone inflation eases. Apart from that, cautious market sentiment could keep the JPY safe and help limit the upside of the EUR/JPY cross. Therefore, it will be prudent to wait for continued buying before confirming a near-term low and positioning for any significant upside.