EUR/JPY flat-lines above 158.00 mark, eyes ECB decision for fresh directional impetus

The EUR/JPY cross reverses an intraday dip to sub-158.00 levels and climbs to a fresh daily peak during the early part of the European session on Thursday. Spot prices currently trade around the 158.20-158.20 region, unchanged for the day, as traders keenly await the outcome of the highly-anticipated European Central Bank (ECB) meeting.

Market participants remain divided on whether the ECB will hike interest rates for a 10th straight time amid still-hight inflation or pause its historic policy-tightening cycle in the wake of a darkening Euro Zone economic outlook. A recent Reuters report, however, suggested that the central bank could revise its 2024 inflation forecast upwards, well past the 3% mark, and revive speculations about a potential rate hike. Hence, the pivotal ECB rate decision will play a key role in influencing the sentiment surrounding the shared currency and provide a fresh directional impetus to the EUR/JPY cross.

In the meantime, bets that the Bank of Japan (BoJ) will end its ultra-easy monetary policy underpin the Japanese Yen (JPY) and should cap the upside for the EUR/JPY cross. Investors now seem convinced that BoJ may scrap its yield-curve control (YCC) policy and put an end to negative interest rates as early as this year. The expectations were lifted by BoJ Governor Kazuo Ueda's remarks over the weekend. In an interview with Yomiuri newspaper, Ueda said that raising interest rates is among the options available if the BoJ becomes confident that prices and wages will keep going up sustainably.

Apart from this, worries about the worsening economic conditions in China could further benefit the JPY's relative safe-haven status and contribute to keeping a lid on the EUR/JPY cross. Heading into the key central bank event risk, the aforementioned fundamental backdrop warrants some caution before placing fresh bullish bets around the cross and positioning for an extension of this week's bounce from over a one-month low. The focus will then shift to the Chinese macro data dump, scheduled for release during the Asian session on Friday, which could further infuse volatility in the global financial markets.

Technical levels to watch