EUR/JPY remains supported above 131.50 area despite more cautious tone from Lagarde

• EUR/JPY slipped back from earlier highs above 132.00 as ECB’s Lagarde sounded a little more cautious.
• However, the pair remained decently supported above the key 131.50 level, an area that may continue to offer support this week.

EUR/JPY stabilise above a key level of support at 131.50 on Monday, after hitting fresh three-month highs above 132.00 earlier in the session. In wake of her hawkish press conference after last week’s ECB meeting that sent the euro lurching higher versus its G10 counterparts, President Christine Lagarde struck a more measured tone on Monday. This helped bring the EUR/JPY back from earlier session highs and has calmed calls for an imminent test of the Q4 2021 highs in the mid-133.00s.

For reference, Lagarde gave some additional dovish context to last week’s hawkish shift. She continued to imply that a rate hike in 2022 was a possibility and noted the ECB might revise up its inflation forecast to see it remaining above 2.0% at the end of the year. However, she emphasised that there would be no need for major policy tightening, given that inflation is expected to stabilise near 2.0% in the medium term. Rather, she emphasised, it would just be policy normalisation.

EUR/JPY traders will not turn their focus to a speech from ECB Chief Economist Philip Lane on Thursday. Like Lagarde, Lane has consistently underestimated inflation in recent months and was until only very recently pushing the idea it would end 2022 under 2.0%. With Lagarde having now dropped that stance, Lane probably has too. A more hawkish-sounding Lane should thus not be surprising, but could nonetheless continue to offer EUR/JPY support this week, with BoJ policymakers expected to remain as dovish as ever. That might imply the pair remains supported above support at 131.50 this week, barring any catalyst for safe-haven assets that benefit the yen.