- EUR/JPY gains positive traction for the second straight day, though the upside seems limited.
- A combination of factors undermines the safe-haven JPY and lends some support to the cross.
- Geopolitical tensions and BoJ rate hike bets to limit the JPY losses, warranting caution for bulls.
The EUR/JPY cross attracts some dip-buying following the previous day's modest pullback from over a one-week top and sticks to its intraday gains through the early European session on Tuesday. Spot prices currently trade just above the mid-161.00s, up nearly 0.50% for the day, and draw support from the offered tone surrounding the Japanese Yen (JPY).
Against the backdrop of the recent dovish remarks by Bank of Japan (BoJ) Deputy Governor Shinichi Uchida, a positive tone around the equity markets is seen undermining demand for the safe-haven JPY. In fact, Uchida said last week that the central bank won't hike rates when markets are unstable. Furthermore, a former BoJ board member Makoto Sakurai predicted a rate hike only by March 2025 citing the recent market turmoil and the low likelihood of a rapid economic recovery.
That said, the BoJ's summary of opinions from the July policy meeting released last week indicated that some members see room for further rate hikes and policy normalization. Moreover, the risk of a further escalation of geopolitical tensions in the Middle East, along with the protracted Russia-Ukraine war, should keep a lid on the market optimism and help limit JPY losses. This, along with the lack of any buying around the shared currency, should contribute to capping gains for the EUR/JPY cross.
Hence, it will be prudent to wait for strong follow-through buying before positioning for an extension of the pair's recent strong recovery move from the 141.70-141.65 region, or the lowest level since early January touched last week. Traders now look to the flash Eurozone Q2 GDP print on Wednesday for a fresh impetus ahead of the prelim Japanese Q2 GDP report on Thursday. Apart from this, geopolitical developments should produce short-term opportunities around the EUR/JPY cross.
Japanese Yen FAQs
The Japanese Yen (JPY) is one of the world’s most traded currencies. Its value is broadly determined by the performance of the Japanese economy, but more specifically by the Bank of Japan’s policy, the differential 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 directly intervened in currency markets sometimes, generally to lower the value of the Yen, although it refrains from doing it often due to political concerns of its main trading partners. The current BoJ ultra-loose monetary policy, based on massive stimulus to the economy, has caused the Yen to depreciate against its main currency peers. This process has exacerbated more recently due to an increasing policy divergence between the Bank of Japan and other main central banks, which have opted to increase interest rates sharply to fight decades-high levels of inflation.
The BoJ’s stance of sticking to ultra-loose monetary policy has led to a widening policy divergence with other central banks, particularly with the US Federal Reserve. This supports a widening of the differential between the 10-year US and Japanese bonds, which favors the US Dollar against the Japanese Yen.
The Japanese Yen is often seen as a safe-haven investment. This means that in times of market stress, investors are more likely to put their money in the Japanese currency due to its supposed reliability and stability. Turbulent times are likely to strengthen the Yen’s value against other currencies seen as more risky to invest in.
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