EUR/JPY consolidates overnight pullback from multi-year peak, holds above mid-157.00s

The EUR/JPY cross struggles to gain any meaningful traction on Friday and consolidates the previous day's sharp retracement slide from the 159.75 region, or its highest level since August 2008. Spot prices remain confined in a narrow band through the early part of the European session, albeit manage to hold above mid-157.00s.

The shared currency draws some support from hawkish-sounding remarks by the European Central Bank (ECB) policymaker, Francois Villeroy de Galhau, keeping the door open for more interest rate hikes. De Galhau noted that the underlying inflation has peaked since April and appears to have begun its decline, but this encouraging sign is still far from sufficient. He added that options are open at the next and upcoming rate meetings, though interest rates may be very close to a peak.

This comes on the back of the overnight comments by Isabel Schnabel, who is considered one of the most hawkish members of the ECB, saying that a slower-than-predicted Euro Zone growth does not necessarily void the need for more rate hikes. Adding to this, ECB Vice-President Luis de Guindos said that the central bank is nearing the end of its hiking rate cycle but the decision on whether to further tighten its monetary policy at its next meeting in two weeks is still open for debate.

This marks a big divergence in comparison to a more dovish stance adopted by the Bank of Japan (BoJ), which is seen as another factor behind the Japanese Yen's (JPY) relative underperformance and contributes to limiting the downside for the EUR/JPY cross. In fact, the BoJ is the only central bank in the world to maintain negative interest rates Moreover, the recent remarks by BoJ officials ensure that the central bank will stick to its ultra-easy monetary policy settings until next summer.

The aforementioned fundamental backdrop favours the EUR/JPY bulls and suggests that the path of least resistance is to the upside. Hence, any subsequent fall might still be categorized as a corrective decline and is more likely to get bought into. This, in turn, makes it prudent to wait for strong follow-through selling before confirming that spot prices have formed a near-term top and placing aggressive bearish bets.

Technical levels to watch