EUR/JPY slides back below 156.00 as fears of intervention underpins Japanese Yen

• EUR/JPY remains under some selling pressure for the second straight day on Monday.
• Friday’s disappointing Eurozone PMIs undermine the Euro and act as a headwind.
• Intervention warning boosts the JPY and contributes to the modest intraday losses.
• The BoJ-ECB policy divergence should limit losses and warrants caution for bears.

The EUR/JPY cross struggles to capitalize on Friday's goodish intraday bounce from the 155.00 psychological mark and kicks off the new week on a softer note. The selling bias picks up pace during the early European session and drags spot prices back below the 156.00 mark in the last hour. 

Friday's disappointing flash Eurozone PMIs added to worries about economic headwinds stemming from rising borrowing costs and could leave the European Central Bank (ECB) in a policy dilemma. This, in turn, is seen as a key factor behind the shared currency's relative underperformance, which, along with a pickup in demand for the Japanese Yen (JPY), turn out to be key factors exerting some pressure on the EUR/JPY cross.

Japan's top currency diplomat Masato Kanda stepped up warnings against the recent weakness in the JPY and told reporters that Japan will not rule out any options available to respond appropriately to excessive currency moves. Furthermore, Japanese Finance Minister Shunichi Suzuki said that we will continue to watch the forex market with a sense of urgency, fueling speculations that authorities could intervene to stem JPY's weakness.

Moreover, the Bank of Japan (BoJ), in the Summary of Opinions from the June policy meeting, noted that there is a strong chance that inflation will moderate toward the middle of the current fiscal year, but won't slow back below 2%. Moreover,  one of the board members said that the BoJ should discuss revising its controversial yield curve control (YCC) policy at an early stage. This further benefits the JPY and weighs on the EUR/JPY cross.

However, expectations that BoJ's negative interest-rate policy will remain in place at least until next year might hold back traders from placing aggressive bullish bets around the EUR/JPY cross. It is worth recalling that BoJ Governor Kazuo Ueda recently ruled out the possibility of any change in ultra-loose policy settings. This marks a big divergence in comparison to the ECB's hawkish stance and should lend support to the EUR/JPY cross.

Apart from this, a generally positive tone around the equity markets could undermine the safe-haven JPY and contribute to limiting any meaningful corrective decline in the absence of any relevant market-moving data from the Eurozone. This makes it prudent to wait for strong follow-through selling around the EUR/JPY cross before confirming that the recent rally to the highest level since September 2008 has run out of steam.

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