EUR/JPY clings to gains above mid-3-week high of 161.00 amid modest JPY weakness

VaselineSeptember 26, 2024

0 2 minutes read

EUR/JPY draws buyers for the third day in a row and climbs to a multi-week high.
A combination of factors is undermining the JPY and providing some support to the crossover.
Divergent ECB-BoJ policy expectations warrant caution for bullish traders.

The EUR/JPY cross is gaining positive traction for a third consecutive day and is climbing to a three-and-a-half-week high in the first half of Thursday’s European session. Spot prices are currently trading around the 161.55-161.60 region, up over 0.25% on the day, with bulls looking to build on momentum beyond the 50-day simple moving average (SMA) and

The Japanese yen (JPY) is being undermined by political uncertainty in Japan, where the ruling Liberal Democratic Party (LDP) will elect its new president on Friday to replace incumbent Prime Minister Fumio Kishida. Apart from this, there is a generally positive tone around the equity markets, affecting the safe haven status of the JPY and providing some support to the EUR/JPY cross.

However, upside for the EUR/JPY exchange remains capped amid a modest pullback in the shared currency. Dismal data from the euro zone this week bolstered the case for an interest rate cut of at least 25 basis points (bps) by the European Central Bank (ECB) at its October meeting. This marks a big divergence compared to expectations from the Bank of Japan (BoJ) and caps the pair.

Investors seem convinced that the BoJ will raise interest rates again by the end of this year. The bets were reaffirmed by the minutes of the BoJ meeting, published earlier, showing that board members shared a view on the need for vigilance against the risk of overshooting inflation and that it is appropriate to moderately adjust the degree of monetary support. This calls for caution for EUR/JPY bulls.

From a technical perspective, the 50-day simple moving average (SMA) earlier this month crossed below the all-important 200-day SMA, forming a bearish “Death Cross” on the daily chart. This further makes it prudent to wait for a strong follow-on buy before positioning for an extension of EUR/JPY’s recent uptrend seen over the past two weeks or so.

Frequently Asked Questions about the Japanese Yen

The Japanese Yen (JPY) is one of the most traded currencies in the world. Its value is largely determined by the performance of the Japanese economy, but more specifically by Bank of Japan policy, the difference 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 intervened directly in currency markets on occasion, generally to depress the yen, although it refrains from doing so because of the political concerns of its main trading partners. The BoJ’s current ultra-loose monetary policy, based on massive stimulus to the economy, has caused the yen to depreciate against its major peers. This process has been exacerbated more recently by a widening policy divergence between the Bank of Japan and other major central banks, which have opted to raise interest rates sharply to fight decades-high levels of inflation.

The BoJ’s stance of sticking to ultra-loose monetary policy has led to increased policy divergence with other central banks, particularly the US Federal Reserve. This supports a widening of the spread between US and Japanese 10-year bonds, which favors the US dollar against the Japanese yen.

The Japanese yen is often seen as a safe investment. This means that during periods of market stress, investors are more likely to put their money into the Japanese currency due to its supposed reliability and stability. Troubled times are likely to strengthen the value of the yen against other currencies considered riskier to invest in.

VaselineSeptember 26, 2024

0 2 minutes read

Frequently Asked Questions about the Japanese Yen

Vaseline

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