The EUR/JPY cross witnessed a bullish spike, briefly touching the 155.00 level, but swiftly plummeted to its lowest point since mid-June following a somewhat hawkish message from the Bank of Japan (BoJ) on Friday.
However, during the early European session, spot prices managed to regain a major portion of their intraday losses, trading just above the 153.00 mark, almost unchanged for the day.
The BoJ decided to introduce more flexibility to its Yield Curve Control (YCC) policy, announcing that the 0.5% cap on the 10-year Japanese government bond yield would now be treated as “references” rather than “rigid limits.”
Additionally, the central bank indicated that it would intervene in the markets when the yield reaches 1.0%, signaling a potential move away from the massive monetary stimulus.
Consequently, the 10-year JGB yield surged to its highest level since September 2014, bolstering the JPY and prompting aggressive intraday selling around the EUR/JPY cross.
The sudden drop in spot prices amounted to approximately 350 pips, finding some support near the 151.40 region after BoJ Governor Kazuo Ueda stressed the importance of maintaining monetary support during the post-meeting press conference.
He emphasized the central bank’s readiness to implement further policy easing if necessary and acknowledged that more time would be required to sustainably achieve the 2% inflation target.
Furthermore, a positive sentiment surrounding US equity futures undermined the safe-haven JPY, providing some buying support for the EUR/JPY cross at lower levels.
Nevertheless, any significant recovery remains uncertain, as buyers remain cautious about the shared currency due to mixed signals regarding the European Central Bank’s (ECB) next policy move. The lack of explicit forward guidance from the ECB on Thursday raised the possibility of a potential pause in September.
Moreover, ECB policymaker Madis Muller stated on Friday that rate-hike decisions were no longer obvious at the current level. Similarly, ECB’s Boštjan Vasle mentioned that the September meeting could bring either a hike or a pause.
Adding to the challenges, the Euro Zone’s economic downturn worsened, driven by disappointing PMI prints for July, which could continue to undermine the Euro and restrict gains in the EUR/JPY cross, at least for the time being.
Hence, it would be prudent to await strong follow-through buying before concluding that the recent sharp corrective decline from the 158.00 mark, the highest level since September 2008, has reached its conclusion.
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