EUR/JPY eases from one-week top, remains on the defensive below mid-158.00s

• EUR/JPY retreats from a one-week high touched on Tuesday, albeit lacks follow-through.
• A combination of factors underpins the JPY and exerts downward pressure on the cross.
• The divergent ECB-BoJ outlook continues to lend support and helps limit the downside.

The EUR/JPY cross attracts some intraday selling near the 158.65 region, or a one-week high touched this Tuesday and remains depressed through the first half of the European session. Spot prices currently trade around the 158.35-158.30 area, down nearly 0.15% for the day, and for now, seem to have snapped a three-day winning streak, with bears now awaiting a break below the 200-hour Simple Moving Average (SMA) before placing fresh bets.

The Japanese government, in its annual economic white paper released this Tuesday, signalled that the economy was nearing an end to prolonged stagnation. The report added that Japan may be at an inflexion point in its 25-year battle with deflation as price and wage rises show signs of broadening. This, in turn, fuels speculations that the Bank of Japan (BoJ) could phase out the massive monetary support. Apart from this, persistent fears that Japanese authorities will intervene in the foreign exchange markets underpin the Japanese Yen (JPY) and exert some downward pressure on the EUR/JPY cross.

The shared currency's relative underperformance could also be attributed to speculations that the European Central Bank (ECB) will halt its rate-hiking cycle sooner rather than later, against the backdrop of looming recession risks. The bets were lifted by the flash PMI prints, which showed that business activity in the Euro Zone declined more than expected in August. That said, ECB President Christine Lagarde reiterated last Friday that interest rates will need to stay high as long as necessary to slow still-high inflation, reaffirming market expectations for at least one more 25 bps lift-off by the end of this year.

In contrast, BoJ Governor Kazuo Ueda noted that the underlying inflation in Japan remains a bit below the 2% target, ensuring that the central bank may keep the status quo until next summer. The divergent ECB-BoJ policy outlook is holding back traders from placing aggressive bearish bets around the EUR/JPY cross, warranting some caution before positioning for any further losses. Market participants now look forward to the release of the flash version of inflation figures from Germany on Wednesday and the Euro Zone on Thursday. The data will influence the Euro and provide some meaningful impetus.

Investors this week will also confront the release of the official Chinese PMI prints and important US macro releases scheduled at the beginning of a new month, including the closely-watched monthly employment details. This will drive the broader market risk sentiment and demand for the safe-haven JPY, which, in turn, should provide some meaningful impetus to the EUR/JPY cross.

Technical levels to watch