EUR/JPY holds above 200DMA in 130.50s in quiet Monday trade as BoJ rate decision looms

EUR/JPY has stabilised to the north of its 200-day moving average at 130.58 on Monday in quiet trade with US markets shut for MLK Day. Volumes are expected to pick up during the upcoming Asia Pacific session with the BoJ set to announce policy. No changes to the central bank’s ultra-dovish stance is expected, but sources have hinted that 1) inflation and growth forecasts could be lifted and 2) some BoJ policymakers are keen to discuss the conditions for a reduction of stimulus. Indeed, hawkish chatter from BoJ sources last week ahead of the upcoming meeting was one reason why EUR/JPY fell briefly below 130.0 last week.

However, EUR/JPY’s dip last week below the big figure was used as an opportunity to add to long positions by bulls and those seeking to play the range. Seemingly traders did not see hawkish BoJ chatter as reason enough to push EUR/JPY back into its late-November/most-of-December 127.50-129.50ish ranges and the fundamentals do back this up. Yes, global equities have weakened since the start of the year as a result of monetary policy tightening fears (mostly regarding a potentially overly aggressive Fed) and this has contributed to EUR/JPY pulling back from recent highs above 131.50.

But Fed tightening fears, which have pushed US bond yields substantially higher since the start of the year, are also exerting hawkish pressure on Eurozone money and bond markets. Despite assurances from “core” ECB policymakers (like President Christine Lagarde and Chief Economist Philip Lane) that the conditions for a rate hike will not be met in 2022, money markets are pricing 20bps of tightening by the end of 2022 (and 10bps by October). Meanwhile, the German 10-year is probing 0.0%, up nearly 40bps from its December lows. Recent fundamental developments thus clearly favour EUR/JPY remaining in its recent 130.00-131.50ish range, barring a significant turnaround in Eurozone yields or ECB rate hike bets.