EUR/JPY sticks to modest recovery gains above mid-157.00s, lacks follow-through

• EUR/JPY regains positive traction and snaps a two-day losing streak to over a two-week low.
• A combination of factors undermines the safe-haven JPY and lends some support to the cross.
• Reduced bets for another ECB rate hike in September might keep a lid on any further upside.

The EUR/JPY cross attracts some buying during the Asian session on Thursday and moves away from over a two-week low, around the 156.85 region touched the previous day. Spot prices currently trade just above mid-157.00s, up nearly 0.15% for the day, and for now, seem to have stalled a two-day corrective decline from the highest level since September 2008.

The latest optimism led by signs of easing US-China trade tensions undermines the safe-haven Japanese Yen (JPY) and turns out to be a key factor lending some support to the EUR/JPY cross. It is worth recalling that the US Commerce Department’s Bureau of Industry and Security (BIS) announced on Monday that it is removing 27 Chinese entities from its Unverified List. China welcomed the move and said that it was conducive to normal trade between the two nations. Adding to this, US Secretary of Commerce Gina Raimondo's visit to China on August 27-30, for meetings with senior Chinese officials, further boosts investors' confidence.

Apart from this, the Bank of Japan's (BoJ) dovish stance is seen as another factor weighing on the JPY and acting as a tailwind for the EUR/JPY cross. In fact, the BoJ is the only central bank in the world to maintain negative interest rates. Moreover, policymakers have emphasised that a sustainable pay hike is a prerequisite to consider dismantling the massive monetary stimulus. That said, a host of manufacturing surveys released on Wednesday painted a grim picture of the health of economies across the globe and fueled recession fears. This, in turn, might hold back traders from placing aggressive bearish bets around the JPY.

Furthermore, speculations that the European Central Bank (ECB) will halt its streak of nine consecutive rate hikes in September could further contribute to keeping a lid on the EUR/JPY cross. Money market futures are now pricing in just a 40% chance of a 25 bps lift-off from the ECB in September as compared to roughly a 60% chance priced in ahead of the dismal Euro Zone PMI prints released on Wednesday. The HCOB Flash German Composite PMI missed estimates and fell to 44.7, hitting its lowest since May 2020 and pointing to a deeper economic downturn. This warrants caution before placing bullish bets around the cross.

Technical levels to watch