EUR/JPY slips back below mid-156.00s amid modest JPY strength, no follow-through

• EUR/JPY meets new supply on Tuesday and blocks recovery from over one-month low.
• Divergent BoJ-ECB outlooks continue to act as a headwind for the cross and exert pressure.
• Traders may prefer to wait for the key BoJ policy meeting before placing new directional bets.

The EUR/JPY cross is attracting fresh sellers following an Asian session rally in the 157.10 area and blocking a modest recovery move near the psychological 155.00 mark or the lowest level since August touched the previous day. Spot prices are falling in the 154.25-154.20 region in the last hour and look vulnerable to extending the recent downtrend seen over the past two weeks or so.

The Japanese yen (JPY) continues to be supported by recent driver signals from Bank of Japan (BoJ) officials that the central bank will raise interest rates further by the end of this year. Apart from this, market jitters ahead of this week’s key central bank event risks are proving to be another factor benefiting the JPY’s relatively safe status and putting downward pressure on the EUR/JPY cross.

The US Federal Reserve (Fed) is scheduled to announce its policy decision at the end of a two-day meeting on Wednesday, which will be followed by the Bank of England’s (BoE) policy update. The focus, however, will remain on the highly anticipated BoJ policy update on Friday, which will influence the short-term JPY price dynamics and determine the next step of a directional move for the EUR/JPY cross.

Meanwhile, the prevailing selling trend in the US dollar (USD), amid bets for an outsized rate cut by the Federal Reserve (Fed), is seen providing some support to the shared currency. This could prevent traders from placing aggressive bear bets around the EUR/JPY cross and limit deeper losses. That said, the divergent BoJ-ECB policy outlook suggests that the path of least resistance for spot prices remains down.

It is worth recalling that the European Central Bank (ECB) last week decided to cut interest rates for the second time this cycle and indicated a downward trajectory for borrowing costs in the coming months. However, reports that ECB policymakers see an October rate cut as unlikely, barring a major deterioration in the growth outlook, could continue to provide some support for the euro and the EUR/JPY cross.