EUR/JPY drops to over one-week low, below mid-156.00s on Japan intervention fears/risk-off

• EUR/JPY drifts lower for the third successive day and drops to a nearly two-week low on Friday.
• Intervention fears, a softer risk tone benefit the safe-haven JPY and exert pressure on the cross.
• The ECB-BoJ policy divergence favours bullish traders and should help limit any further decline.

The EUR/JPY cross remains under some selling pressure for the third successive day on Thursday and drops to a one-and-half-week low, around the 156.35-156.30 region during the Asian session.

The potential risk of intervention by Japanese authorities, along with a weaker tone around the equity markets, revives demand for the safe-haven Japanese Yen (JPY). The shared currency, on the other hand, is undermined by less hawkish remarks by the European Central Bank (ECB) Governing Council member Ignazio Visco on Wednesday, backing the case for a pause in the rate-hiking cycle. Addressing the annual general meeting of the Italian Banking Association (ABI), Visco said rates had reached restrictive territory and that the ECB could bring inflation back in line with its price stability goal by holding rates for a certain period of time rather than hiking them more.

Market participants, however, seem convinced that the ECB will increase borrowing costs again in July and September meetings despite signs the Euro Zone economy is flagging. In fact, ECB President Christine Lagarde said last week that inflation in the Euro Zone is too high and is set to remain so for too long. This, in turn, cemented market expectations for a ninth consecutive lift-off in July and also lifted bets for more rate hikes from the ECB this year. Even the International Monetary Fund (IMF) said on Friday that the ECB should continue to raise rates to bring down inflation. In contrast, the Bank of Japan (BoJ) is expected to stick to its dovish stance, which should limit losses for the EUR/JPY cross.

Market participants seem convinced that BoJ's negative interest-rate policy will remain in place at least until next year. Moreover, BoJ Governor Kazuo Ueda, despite the fact that inflation in Japan has exceeded the 2% goal for more than a year, ruled out the possibility of any change in ultra-loose policy settings and signalled no immediate plans to alter the yield curve control measures. This makes it prudent to wait for strong follow-through selling before placing fresh bearish bets around the EUR/JPY cross and positioning for an extension of the recent pullback from the 158.00 mark, or its highest level since September 2008 touched last Wednesday.

Technical levels to watch