After rallying sharply for the past month, EUR/JPY only began to pull back this week as the battered yen made a modest bounce. Prior to this yen bounce, the Japanese currency had been heavily pressured due to a still-dovish Bank of Japan (BoJ), as well as low safe-haven demand for the Japanese yen amid a prolonged risk-on market environment. Meanwhile, the euro has remained well-supported since April on rising speculation that the European Central Bank (ECB) could be preparing to indicate an impending reversal in its long-held monetary policy stance.
The week ahead will be critical for the EUR/JPY currency pair, as both the ECB and BoJ will be announcing their respective monetary policy decisions – and both on Thursday of next week. Neither of the two central banks is expected to make any interest rate changes for the time being, but their policy stances will be critical in mapping out the near-term trajectory of both the euro and yen.
While the BoJ has remained relatively dovish in contrast with the recent hawkish leanings of other major central banks, the ECB has telegraphed possible changes to its monetary policy stance. This could include potential near-term tapering of the ECB’s extensive stimulus programs amid a strengthening Eurozone economy and in the wake of ECB President Mario Draghi’s recent comments on rising inflation in the Euro area.
Ahead of these two critical central bank decisions, EUR/JPY continues to be entrenched in a strong bullish trend, despite this week’s modest pullback. If the BoJ remains as dovish as expected, and the ECB provides any further hints of a hawkish shift in its policy, this uptrend should be poised to extend further. In this event, the next major upside target is at the key 132.00 resistance level. With any continued rise above 132.00, a further upside objective is around the 134.50 resistance level.
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