EUR/JPY trades with modest intraday gains above 158.00, bullish bias remains

• EUR/JPY gains some positive traction on Monday, albeit lacks strong follow-through.
• Intevention fears, along with a softer risk tone, lend support to the JPY and cap gains.
• The BoJ-ECB policy divergence should continue to limit the downside for the cross.

The EUR/JPY cross attracts some buying during the Asian session on Monday and rallies nearly 60 pips from the daily low, albeit struggles to capitalize on the intraday positive move. Spot prices currently trade around the 158.15-158.20 region, up less than 0.10% for the day.

The Japanese Yen (JPY) weakens after reports indicated that the Bank of Japan (BoJ) will purchase an unlimited quantity of government bonds at a fixed rate with residual maturity of 5 years to 10 years. This turns out to be a key factor that lends some support to the EUR/JPY cross. That said, fears of intervention by Japanese authorities, along with a generally weaker risk tone, limit losses for the safe-haven JPY and cap gains for spot prices, at least for the time being.

The market sentiment remains fragile in the wake of growing concerns about the worsening economic conditions in China. Adding to this, a smaller-than-expected rate cut by the People’s Bank of China (PBoC) signals limited policy support for the economy, despite worries about a deepening crisis in China's property sector, and further tempers investors' appetite for riskier assets. The downside for the EUR/JPY cross, however, remains cushioned amid the BoJ's dovish stance.

It is worth recalling that BoJ is the only central bank in the world to maintain negative interest rates. In contrast, the European Central Bank (ECB) has raised borrowing costs by a combined 425 bps since last July and is expected to deliver one more rate hike by the end of this year. This should continue to act as a tailwind for the EUR/JPY cross, which, in turn, warrants some caution before positioning for an extension of the recent pullback from a multi-year peak touched last week.

In the absence of any relevant market-moving economic data, the broader risk sentiment will drive demand for the safe-haven JPY and provide some impetus to the EUR/JPY cross on Monday. The focus will then shift to the BoJ's Core CPI, due on Tuesday, and the flash Euro Zone PMI prints, scheduled for release on Wednesday. Nevertheless, the aforementioned fundamental backdrop favours bullish traders and suggests that the path of least resistance for spot prices is to the upside.

Technical levels to watch