EUR/JPY trims a part strong intraday gains, manages to hold above 159.00 mark

EUR/JPY gains strong positive traction, albeit it struggles to find acceptance above the 160.00 mark.
The risk-on impulse undermines the safe-haven JPY and prompts short-covering around the cross.
The divergent BoJ-ECB policy outlook warrants some caution before positioning for further upside.

The EUR/JPY cross builds on the previous day's goodish bounce from the 154.40-154.35 region, or the YTD low and scales higher during the Asian session on Tuesday. Spot prices, however, retreat nearly 100 pips from the daily top and currently trade around the 159.25-159.20 region, still up over 0.80% for the day.

A positive turnaround in the risk sentiment – as depicted by a relief rally across the global equity markets – undermines demand for the safe-haven Japanese Yen (JPY) and prompts some follow-through short-covering around the EUR/JPY cross. That said, a combination of factors helps limit deeper JPY losses, which, along with the divergent Bank of Japan (BoJ)-European Central Bank (ECB) policy expectations, fails to assist spot prices to capitalize on the strength beyond the 160.00 psychological mark.

Against the backdrop of China's economic woes, the incoming US macro data suggested that the world's largest economy was slowing faster than initially expected. This, along with geopolitical risks stemming from the ongoing conflicts in the Middle East, should keep a lid on the market optimism. Furthermore, bets that the BoJ will tighten monetary policy again, bolstered by a rise in Japan's real wages in June for the first time in more than two years, contribute to capping gains for the EUR/JPY cross.

Official data released earlier today showed that Japan's inflation-adjusted real wages increased by 1.1% in June, while nominal pay grew by 4.5% or the fastest pace in nearly three decades. Moreover, public broadcaster NHK reported that the Japanese labour ministry has decided to raise the national average minimum wage by about 5% – the biggest ever jump. This bodes well with the BoJ's plan to steadily raise interest rates and warrants some caution before placing bullish bets around the EUR/JPY cross.

Bank of Japan FAQs

What is the Bank of Japan?

The Bank of Japan (BoJ) is the Japanese central bank, which sets monetary policy in the country. Its mandate is to issue banknotes and carry out currency and monetary control to ensure price stability, which means an inflation target of around 2%.

What has been the Bank of Japan’s policy?

The Bank of Japan has embarked in an ultra-loose monetary policy since 2013 in order to stimulate the economy and fuel inflation amid a low-inflationary environment. The bank’s policy is based on Quantitative and Qualitative Easing (QQE), or printing notes to buy assets such as government or corporate bonds to provide liquidity. In 2016, the bank doubled down on its strategy and further loosened policy by first introducing negative interest rates and then directly controlling the yield of its 10-year government bonds.

How do Bank of Japan’s decisions influence the Japanese Yen?

The Bank’s massive stimulus 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 policy of holding down rates has led to a widening differential with other currencies, dragging down the value of the Yen.

Is the Bank of Japan’s ultra-loose policy likely to change soon?

A weaker Yen and the spike in global energy prices have led to an increase in Japanese inflation, which has exceeded the BoJ’s 2% target. With wage inflation becoming a cause of concern, the BoJ looks to move away from ultra loose policy, while trying to avoid slowing the activity too much.

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