The EUR/JPY currency pair is showing signs of cooling after marking a new yearly high of 173.25 earlier in Wednesday’s session. By mid-American trading hours, the pair had slipped to trade around the 172.00 level, pulling back amid a stronger Japanese Yen (JPY) and growing caution ahead of key economic and political events in Japan and Europe.
This modest retreat in the Euro (EUR) versus the Yen ends a three-day winning streak, which saw bullish momentum push the cross to its highest level in over a year. However, the rally has stalled due to a combination of profit-taking, elevated Japanese bond yields, and dovish rhetoric from the European Central Bank (ECB). With strong industry knowledge, Fletrade’s experts provide a detailed overview of this topic.
Yen Strengthens on Surging Bond Yields and Political Tailwinds
The Japanese Yen is gaining ground across major FX crosses on Wednesday, buoyed by a significant jump in Japan’s 10-year government bond yield, which rose to 1.6%, the highest level since 2008. This sharp move in the JGB (Japanese Government Bond) market reflects growing market conviction that Japanese authorities may consider more fiscal stimulus or policy normalization, especially with the Upper House election scheduled for Sunday, July 20.
Anticipation of expanded government spending and speculation about a possible consumption tax cut are fueling domestic demand for the Yen. Higher interest rate differentials between Japan and other economies have long weakened the Yen, but the sudden upward pressure on yields suggests a potential shift in Japan’s economic outlook, increasing the appeal of the Yen for yield-sensitive investors.
ECB’s Cautious Stance Adds to Euro’s Headwinds
While the Yen benefits from domestic momentum, the Euro is under pressure following comments from ECB policymaker Joachim Nagel. Speaking on Wednesday, Nagel emphasized the need for a “steady hand” in managing monetary policy amid persistent inflation risks and uncertain global trade dynamics.
His remarks indicate that the European Central Bank is unlikely to raise interest rates in the near term, with the next ECB meeting expected to see no change in policy.
The ECB’s reluctance to act aggressively stands in contrast to market expectations earlier in the year that more hawkish tightening could be on the table. With core inflation still proving sticky in parts of the Eurozone, a pause in rate hikes may dent the Euro’s attractiveness, especially against safe-haven currencies like the JPY in times of geopolitical or market volatility.
Technical Outlook: EUR/JPY Faces Initial Support Near 171.50
From a technical perspective, the EUR/JPY pair remains in bullish territory, but the current pullback could extend if further risk aversion or Yen strength emerges. Immediate support is seen near 171.50, a zone that aligns with minor moving averages and previous breakout levels.
A break below this region could expose the pair to deeper retracements toward 170.30 or the 170.00 psychological mark.
On the upside, resistance is now firmly established at the recent yearly high of 173.25. A decisive break above this threshold would reaffirm bullish control and potentially open the path toward 174.00 and beyond, especially if upcoming data favors the Euro.
Key Data in Focus: Eurozone Inflation and Japan CPI
Looking ahead, economic data releases will likely dictate short-term direction in the EUR/JPY cross. On Thursday, traders will eye Eurozone inflation figures, which will offer further clues about the ECB’s policy stance. Persistently high inflation could rekindle speculation about future rate hikes, offering some support to the Euro.
Meanwhile, Japan’s CPI (Consumer Price Index) figures are due on Friday, with expectations that core inflation will remain elevated. Any upside surprise could reinforce market sentiment that the Bank of Japan (BoJ) may gradually shift away from ultra-loose monetary policy, adding to upward pressure on Japanese yields and the JPY.
Market Sentiment: Risk Appetite Fragile Amid Uncertainty
In the broader macro landscape, investor sentiment remains cautious. With lingering concerns around global growth, trade tensions, and geopolitical uncertainties, demand for safe-haven assets like the Yen could remain supported in the near term. The Euro, by contrast, may face resistance in sustaining gains unless backed by robust economic data or renewed ECB hawkishness.
Moreover, the political environment in Japan is adding another layer of complexity. Traders are closely watching the upcoming July 20 Upper House election, as its outcome could determine the government’s fiscal direction, including whether stimulus measures like tax cuts or public investment programs will be enacted. Such developments could further influence bond yields and, by extension, the foreign exchange market.
Conclusion: EUR/JPY Pullback Reflects Shifting Fundamentals
The EUR/JPY pair’s retreat from its yearly peak reflects a dynamic shift in underlying market fundamentals. A combination of stronger Japanese yields, election-related fiscal expectations, and a measured ECB stance is realigning the short-term outlook for the cross.
While the long-term trend remains bullish, especially given the Euro’s broader resilience this year, near-term headwinds may cap further gains unless data surprises or central bank signals shift the current narrative.
Traders should remain alert to evolving policy commentary from both the ECB and the BoJ, as well as upcoming inflation releases, which are poised to inject volatility and offer new trading opportunities in the EUR/JPY currency pair.
