EUR/JPY snaps two-day losing streak below 156.00 amid firmer yields, ignores IMF’s push for hawkish BoJ move

EUR/JPY clings to mild gains around 155.85 as market sentiment dwindles during early Wednesday. In doing so, the cross-currency pair prints the first daily gains in three while justifying the firmer US Treasury bond yields, as well as the Yen’s ignorance of the broad push for the Bank of Japan’s (BoJ) restrictive monetary policy.

Recently, the International Monetary Fund (IMF) warned of higher inflation from Japan and urged the Bank of Japan (BoJ) to exit its easy-money policy. On Tuesday, the Japanese government released its inflation outlook while stating that the inflation is seen staying around 0.7% in the longer term. The government also added, “Wages are projected to increase by 2.5% in FY24, following a 2.6% jump in FY23.” (FY=Fiscal Year)

On the other hand, Germany’s IFO Business Climate Index dropped to 87.3 for July versus 88.0 expected and 88.6 prior while the Current Economic Assessment came in as 91.3 for the said month, compared with June’s 93.7 and 93.0 expected. Further, the IFO Expectations Index, a gauge conveying the firms’ projections for the next six months, fell to 83.5 for July versus 83.8 prior and 83.0 market forecasts. Following the mostly downbeat German data, the IFO Economist Klaus Wohlrabe said that the “German GDP likely to shrink in the 3rd quarter.” IFO’s Wohlrabe also added that the weak phase of the German economy is going to be extended. Elsewhere, the European Central Bank’s (ECB) quarterly survey of 158 big banks revealed that firms' demand for credit dropped to the lowest since the survey started in 2003.

Talking about the risks, fresh challenges to the US-China ties via the US Senate’s efforts to control investment in China's tech sector joins the cautious mood ahead of the monetary policy meetings of the Federal Reserve (Fed), European Central Bank (ECB) and the BoJ to prod the sentiment. While portraying the mood, S&P500 Futures print the first daily loss in three around 4,595 by retreating from the one-week high marked the previous day. On the same line, the US 10-year and two-year Treasury bond yield print mild gains around a two-week high registered Tuesday, close to 3.90% and 4.89% in that order by the press time.

Looking forward, a light calendar and the market’s consolidation ahead of the top-tier central bank events may allow the EUR/JPY pair to defend the latest gains. However, downbeat EU data and talks of the hawkish BoJ may disappoint the bulls after monetary policy meetings of the ECB and the BoJ, scheduled for Thursday and Friday respectively.

Technical analysis

EUR/JPY bounces off the 21-day Exponential Moving Average (EMA) surrounding 155.75 but the recovery remains elusive unless crossing the double tops marked around 158.00.