EUR/JPY Price Analysis: JPY trades strong but upside limited by dovish BoJ

• EUR/JPY retreated near the 158.00 area, seeing more than 0.70% losses on the day.
• Alongside the NZD, the JPY is one of the session’s top-performer.
• Tightening expectations for the ECB remain low. Eyes on Lagarde, August PMIs.

In Tuesday’s session, the EUR/JPY lost ground and retreated near the 158.20 area. Higher Japanese yields contributed to the JPY trading strong while the Euro traded soft. Investors await fresh catalyst in the August PMIs figures from August from Germany and Japan to be released on Wednesday.

On the Euro front, the European currency is trading weak against most of its rivals, as investors are taking profits following back-to-back sessions of tallying gains against most of its rivals. For the rest of the week, investors will eye Manufacturing and Services S&P Global and Hamburg Commercial Bank (HCOB) figures from August, which are expected to decelerate. On Friday, Christine Lagarde will speak at the Jackson Hole Symposium, and Germany will release its final Q2 Gross Domestic Product figures estimates.

As for now, tightening expectations from the European Central Bank (ECB) remains low. World Interest Rates Probabilities (WIRP) indicates that markets are discounting 55% odds of a 25bps increase in the upcoming September 14, 2023 meeting from the ECB. Looking forward, the chances of a 25 bps hike stand at 75% in October, followed by an 85% probability of a 25 bps hike in the December meeting. This rate hike path would leave the target rate at 5%.

On the other hand, the Yen recovered ground against its rivals, as the Japanese Government Yields (JGB) rose to their highest level since 2014, including the 10-year rate rising past 0.60%. Those moves may suggest that markets are expecting a potential pivot, but the Bank of Japan (BoJ) hasn’t delivered any signs of leaving its accommodative approach. As for now, they expect higher inflation and wages to start tightening, so in the meantime, monetary policy divergences may continue weakening the JPY in the short term.

EUR/JPY Levels to watch

The EUR/JPY suggests a neutral to bearish technical outlook on the daily chart as bullish momentum wanes. The Relative Strength Index (RSI) shows a negative slope above its midline, and the Moving Average Convergence Divergence (MACD) displays fading green bars. On the bigger picture, the pair is above the 20,100,200-day Simple Moving Average (SMAs), indicating that the buyers are in command.

Support levels: 158.00, 157.50, 157.00.

Resistance levels: 159.00, 160.00, 160.50.

EUR/JPY Daily chart