EUR/JPY struggles to trace firmer yields above 159.00 on chatters about German recession, Japan intervention

• EUR/JPY snaps three-day winning streak but lacks follow-through.
• Treasury bond yields approach worrisome tops, stock futures drop amid sour sentiment.
• Looming concerns about Japan’s meddling to defend Yen, German economic woes prod pair buyers.
• Eurozone Trade Balance will decorate calendar but yields, risk catalysts will be more important for clear directions.

EUR/JPY clings to mild losses around the intraday low of 159.03 as it prints the first daily fall in four heading into Thursday’s European session. In doing so, the cross-currency pair fails to justify the firmer Treasury bond yields amid fears of the Japanese intervention to defend the Yen, as well as chatters that Germany can continue weighing on the Eurozone’s economic optimism.

That said, the US 10-year Treasury bond yields remain firmer at the highest level since October 2022 marked earlier in the day, around 4.29% by the press time. It should be noted that such a high level of bond coupons triggered fears of economic slowdown and drowned the riskier assets, while also underpinning the US Dollar, during late 2022.

On the other hand, global rating agency Fitch Ratings lowered medium-term Gross Domestic Product (GDP) projections for 10 developed economies, including Germany, in its quarterly Global Economic Outlook published Wednesday.

Additionally, mixed EU data also prod the EUR/JPY buyers amid looming concerns that the Japanese policymakers stand ready to intervene in the money markets to defend the Yen. On Wednesday, Eurozone Industrial Production for June marked an unexpected growth of 0.5% MoM versus -0.1% market forecasts and 0.0% previous readings. On the same line, the yearly Industrial Output figures improved to -1.2% YoY from -2.5% marked in May, versus -4.2% anticipated. Further, the second readings of the Eurozone Gross Domestic Product (GDP) for the second quarter (Q2) confirmed the 0.3% QoQ and 0.6% YoY initial estimations but the first readings of the Employment Change eased for the said period.

On the other hand, Japan marked the mixed prints of Merchandise Trade Balance for July and upbeat Machinery Orders for June, which in turn defends the Bank of Japan (BoJ) officials’ support for the ultra-easy monetary policy. Additionally, Japan’s Tertiary Industry Index for June drops to -0.4% MoM versus 1.2% prior.

Elsewhere, hawkish Fed concerns join fears of China’s slower economic recovery to also weigh on the sentiment and prod the EUR/JPY pair’s upside, via the risk-off mood. While portraying the sentiment, S&P500 Futures dropped to the lowest level in five weeks whereas the Eurostoxx 50 Futures also remain depressed at the latest.

Looking ahead, Eurozone Trade Balance for June will act as the immediate catalyst but the risk factors will be crucial for a clear guide.

Technical analysis

Bearish RSI divergence on the daily chart suggests a pullback in the EUR/JPY price towards the seven-week-old resistance-turned-support area surrounding 158.00–15.