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• EUR/JPY cross attracts some dip-buying in reaction to hawkish remarks by ECB’s Knot.
• Intervention fears, along with the cautious mood, benefit the JPY and cap the upside.
• The divergent ECB-BoJ policy suggests that the path of least resistance is to the upside. 

The EUR/JPY cross struggles to capitalize on its positive move witnessed over the past two days and comes under some selling pressure on Wednesday. Spot prices, however, manage to rebound around 40-50 pips from the daily trough touched during the early part of the European session and currently trade with modest intraday losses, around the 158.15-158.20 region, down less than 0.15% for the day.

The shared currency attracts some buyers in reaction to hawkish comments by European Central Bank (ECB) Governing Council member Klaas Knot, which, in turn, assists the EUR/JPY cross to rebound from the 157.75 region. Knot told Bloomberg that investors betting against an interest rate increase next week are possibly underestimating the likelihood of it happening. This, in turn, pushes back against market expectations for an imminent pause in the rate-hiking cycle and prompts some intraday short-covering around the cross.

Knot, however, added that a rate hike is a possibility, not a certainty. This, along with a verbal intervention by Japan's top currency diplomat Masato Kanda, keeps a lid on any further upside for the EUR/JPY cross. In fact, Kanda warned against the recent sell-off in the Japanese Yen (JPY) and said that authorities won't rule out any options if speculative moves in the currency market persist. Apart from this, the cautious market mood benefits the safe-haven JPY and contributes to the mildly offered tone surrounding the cross.

A private survey showed on Tuesday that business activity in China's services sector expanded at its slowest pace in eight months and fueled worries about the worsening conditions in the world's second-largest economy. Apart from this, persistent US-China trade tensions temper investors' appetite for riskier assets. The downside for the EUR/JPY cross, however, remains cushioned in the wake of a dovish stance adopted by the Bank of Japan (BoJ), which remains the only central bank in the world to maintain negative rates.

Furthermore, BoJ policymaker Hajime Takata said earlier today that the central bank must patiently maintain easy policy given very high uncertainty on the outlook, ensuring an extension of the ultra-loose policy settings until next summer. This marks a big divergence in comparison to other major central banks, including the ECB, which might continue to undermine the JPY and suggests that the path of least resistance for the EUR/JPY cross is to the upside. Hence, any meaningful corrective slide might be seen as a buying opportunity.
 

Technical levels to watch

EUR/JPY

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