EUR/JPY consolidates below multi-year peak touched on Tuesday, bullish bias remains

• EUR/JPY lacks any firm intraday direction and oscillates in a narrow band on Wednesday.
• A softer risk tone, along with intervention fears, underpins the JPY and acts as a headwind.
• The BoJ-ECB policy divergence favours bulls and supports prospects for additional gains.

The EUR/JPY cross struggles to gain any meaningful traction and oscillates in a narrow trading band through the Asian session on Wednesday. Spot prices currently trade around the 158.70 region, nearly unchanged for the day, though remain well within the striking distance of the highest level since September 2008 touched on Tuesday.

Persistent worries about the worsening economic conditions in China, along with renewed fears of a more hawkish Federal Reserve (Fed), temper investors' appetite for riskier assets. This is evident from a generally weaker tone around the Asian equity markets, which is seen lending some support to the safe-haven Japanese Yen (JPY). Apart from this, speculations that the recent weakness in the JPY might prompt some jawboning from authorities, or an intervention in the foreign exchange markets, act as a headwind for the EUR/JPY cross.

In fact, Japan's top forex diplomat Masato Kanda said on Tuesday that he would take appropriate steps against excessive currency moves. Japan's Finance Minister Shunichi Suzuki, however, said that authorities are not targeting absolute currency levels when it comes to intervening in the market. This, along with a big divergence in the monetary policy stance adopted by the Bank of Japan (BoJ) and the European Central Bank (ECB), limits the downside for the EUR/JPY cross and warrants caution before positioning for any meaningful corrective decline.

It is worth mentioning that BoJ is the only central bank in the world to maintain a negative benchmark interest rate. Moreover, policymakers have stressed that steps taken in July to make the BoJ's Yield Curve Control (YCC) measures more flexible and allow yield on the 10-year Japanese government bond to move up toward 1% was a technical tweak aimed at extending the shelf life of stimulus. In contrast, the ECB has raised borrowing costs by a combined 425 bps since last July and the markets are still pricing in one more rate hike by the end of this year.

This, in turn, suggests that the path of least resistance for the EUR/JPY cross is to the upside. That said, the recent range-bound price action witnessed over the past week or so points to indecision among traders over the next leg of a directional move for spot prices. Hence, it will be prudent to wait for a sustained strength beyond the 159.00 mark before positioning for any further near-term appreciating move. Nevertheless, the aforementioned fundamental backdrop still seems tilted firmly in favour of bullish traders and supports prospects for additional gains.

Technical levels to watch