EUR/JPY pars some intraday gains, up slightly around 157.00 ahead of ECB decision

• EUR/JPY is riding on an overnight recovery from a one-month low amid modest JPY weakness.
• An unexpected drop in Japan’s PPI, along with a risk-on positive tone, undermines the safe-haven JPY.
• Bets on another BoJ rate hike in 2024 should limit the crossover ahead of the ECB’s key policy decision.

The EUR/JPY cross is gaining some positive traction on Thursday and is still recovering from a more than one-month low around the 155.45 region reached the previous day. Spot prices, however, have retreated a few pips from the daily high and are currently trading around 157.00 as investors look to the European Central Bank’s (ECB) interest rate decision for fresh impetus.

The ECB is expected to announce a 25 basis point (bps) interest rate cut at the end of its September policy meeting, marking the second adjustment in its current policy easing cycle. Market direction will however remain glued to updated economic forecasts and forward guidance. Apart from that, ECB President Christine Lagarde’s comments at the post-meeting press conference will influence the single currency and determine the short-term trajectory for the EUR/JPY cross.

Heading into the key risk of the central banking event, a weak reading in Japan’s producer price index (PPI) undermined driver signals from the Bank of Japan (BoJ) and prompted a sell-off around the Japanese yen (JPY). In fact, the headline PPI fell 0.2% in August and the annual rate fell more than expected to 2.5% from 3.0% in July. This, along with a generally positive tone around equity markets, weakens demand for the safe-haven JPY and lends support to the EUR/JPY cross.

That said, comments from Bank of Japan (BoJ) board member Naoki Tamura, saying the road to an end to easy policy is still very long, reaffirms bets that the central bank will raise borrowing costs further by the end of this year. This marks a big divergence from an accommodative stance taken by the ECB, which should limit JPY losses. Therefore, it will be prudent to wait for continued buying before confirming that the EUR/JPY cross has bottomed.