EUR/JPY keeps the red near mid-157.00s after German IFO survey, lacks follow-through

• EUR/JPY fails to capitalize on the overnight modest gains and meets with a fresh supply on Friday.
• Bets that the ECB will pause its rate-hiking cycle in September act as a headwind for the cross.
• The BoJ’s dovish stance continues to undermine the JPY and helps limit any meaningful decline.
• Traders also seem reluctant ahead of speeches by ECB’s Lagarde and BoJ’s Ueda on Saturday.

The EUR/JPY cross attracts fresh sellers near the 157.75-157.80 region on Friday and reverses a major part of the previous day's positive move. Spot prices drop to a fresh daily low, around the 157.25-157.20 area during the early part of the European session, albeit lack follow-through as traders seem reluctant to place aggressive bets ahead of the key central bank speakers.

The European Central Bank (ECB) President Christine Lagarde will speak at the Jackson Hole Economic Policy Symposium on Saturday. Market participants will look for cues about the future rate-hike path in the wake of mounting speculations that the ECB  will halt its rate-hiking cycle in September. The bets were lifted by the disappointing release of the flash PMI prints, which indicated that business activity in the Euro Zone declined more than expected in August and revived concerns about a deeper global economic downturn.

Adding to this, the IFO survey showed on Friday that the German Business Climate Index dropped further to 85.7 in August as compared to the previous month's reading of 87.4 and 86.7 anticipated. Furthermore, the Current Economic Assessment Index also missed consensus estimates and declined to 89.0 points for July's 91.4. Meanwhile, the IFO Expectations Index – indicating firms’ projections for the next six months – slipped to 82.6 in August from the previous month’s 83.6, falling short of expectations and further fueling recession fears.

This is seen as a key factor behind the shared currency's relative underperformance against its Japanese counterpart and exerting some pressure on the EUR/JPY cross. The downside, however, remains cushioned on the back of the prevalent selling bias surrounding the Japanese Yen (JPY), which is undermined by a dovish stance adopted by the Bank of Japan (BoJ). In fact, the BoJ is the only major central bank in the world to maintain negative rates. In contrast, the ECB has raised borrowing costs by a combined 425 bps since last July.

Moreover, the markets are still pricing in the possibility of one more ECB rate hike move by the end of this year. The BoJ, on the other hand, is expected to stick to its ultra-easy monetary policy settings and the bets were reaffirmed by Friday's release of Tokyo CPI, showing that consumer prices in Japan’s capital city grew at a slower-than-expected pace in August. The data, meanwhile, ensures that the BoJ may keep the status quo until next summer, which supports prospects for the emergence of some dip-buying around the EUR/JPY cross.

The aforementioned fundamental backdrop makes it prudent to wait for strong follow-through selling before positioning for an extension of this week's retracement slide from the vicinity of mid-159.00s, or the highest level since September 2008. Traders might also refrain from placing aggressive directional bets and prefer to wait for BoJ Governor Kazuo Ueda's statement on Saturday, which might further assist investors in determining the next leg of a directional move for the EUR/JPY cross.

Technical levels to watch