EUR/JPY consolidates around 159.00, just below its highest level since September 2008

• EUR/JPY refreshes multi-year peak on Friday, albeit struggles to capitalize on the move.
• Intervention fears benefit the JPY and hold back traders from placing fresh bullish bets.
• The BoJ-ECB policy divergence suggests that the path of least resistance is to the upside.

The EUR/JPY cross enters a bullish consolidation phase and oscillates in a narrow trading band just below its highest level since September 2008 touched earlier this Friday. Spot prices currently trade around the 159.00 mark during the first half of the European session, nearly unchanged for the day.

Speculations that Japanese authorities might intervene in the foreign exchange markets to prop up the domestic currency hold back traders from placing fresh bullish bets around the EUR/JPY cross. Apart from this, speculations that the European Central Bank (ECB) will halt its streak of nine consecutive rate hikes in September, in the wake of easing inflationary pressures and mounting recession fears, contribute to capping the upside for the cross.

That said, a more dovish stance adopted by the Bank of Japan (BoJ), which is the only central bank in the world to maintain a negative benchmark interest rate, helps limit the downside for the EUR/JPY cross. Even the BoJ's recent policy adjustment in July, making the Yield Curve Control (YCC) policy more flexible and allowing yield on the 10-year Japanese government bond to move up toward 1%, has failed to lend support to the Japanese Yen (JPY).

Moreover, policymakers have stressed that the move was a technical tweak aimed at extending the shelf life of stimulus. Adding to this, weaker Japanese wage data released this week reaffirmed market bets that the BoJ will maintain ultra-low interest rates for the rest of the year. This marks a big divergence in comparison to a relatively hawkish ECB, which has raised borrowing costs by a combined 425 bps since last July and favours the EUR/JPY bulls.

The aforementioned supportive fundamental backdrop suggests that the path of least resistance for spot prices is to the upside. Hence, any meaningful corrective decline might be seen as a buying opportunity and is more likely to remain limited. Nevertheless, the EUR/JPY cross remains on track in the green for the second successive week and seems poised to prolong the recent appreciating move witnessed over the past two weeks or so.

Technical levels to watch