EUR/JPY drops below mid-156.00s amid modest JPY strength, lacks staying power

• EUR/JPY sees fresh supply on Tuesday, slowing its recovery from a month-long low.
• The diverging outlooks for the BoJ and ECB continue to pose headwinds for the central bank and put pressure on it.
• Traders may want to wait for the BoJ’s key policy meeting before setting new price targets.

The EUR/JPY cross attracts new sellers after an Asian session uptick to the 157.10 area and stalls its modest recovery move from near the psychological 155.00 mark, or the lowest level since August touched the previous day. Spot prices are falling to the 154.25-154.20 area in the last hour and look vulnerable to extend the recent downtrend of the past two weeks or so.

The Japanese Yen (JPY) continues to be supported by the recent hawkish signals from the Bank of Japan (BoJ) that the central bank will hike interest rates further towards the end of this year. Apart from this, market nervousness ahead of the key risks from this week’s central bank event is proving to be another factor supporting the JPY’s relative safe-haven status and putting downward pressure on the EUR/JPY cross.

The US Federal Reserve (Fed) is expected to announce its policy decision at the end of a two-day meeting on Wednesday, which will be followed by the Bank of England (BoE) policy update. However, the focus will remain on the much-awaited BoJ policy update on Friday, which will influence the near-term dynamics of the JPY price and determine the next leg of a directional move for the EUR/JPY cross.

Meanwhile, the prevailing selling bias in the US dollar (USD), amid bets on an overly large rate cut by the Federal Reserve (Fed), appears to be providing some support to the shared currency. This could deter traders from placing aggressive bearish bets around the EUR/JPY crossroads and could help limit deeper losses. That said, the diverging policy outlooks of the BoJ-ECB suggests that the path of least resistance for spot prices is still to the downside.

It is worth recalling that the European Central Bank (ECB) decided last week to cut interest rates for the second time this cycle and indicated a downward path for borrowing costs in the coming months. Reports that ECB policymakers consider an October rate cut unlikely unless the growth outlook deteriorates significantly could still provide some support to the euro and the EUR/JPY cross.