Euro advances as ECB tightening expectations, Japan fiscal concerns weigh on Yen

On Monday, the Euro (EUR) showcased gains, buoyed by expectations of continued European Central Bank (ECB) monetary tightening. Deutsche Bank analysts stated a near 90% probability of an interest rate hike during the ECB's September gathering. Furthermore, markets are pricing in over two more rate increases, with hikes projected by October and April.

Eurozone inflation surged to 2.9% year-over-year (YoY) in July, while core inflation rose to 2.5% YoY. Concurrently, the Eurozone economy expanded by 0.4% in the second quarter, surpassing initial estimates. This combination of robust growth and stubborn inflation has reinforced expectations for a restrictive ECB policy stance. Meanwhile, the Japanese Yen (JPY) faced pressure despite last week's coordinated intervention by Japan and the United States.

Japan reportedly spent around $34 billion to support the Yen, and Finance Minister Satsuki Katayama affirmed readiness for further intervention if needed. US Treasury Secretary Scott Bessent echoed this, stating the US would cooperate in future interventions. However, Japan's fiscal situation has recently raised concerns. The Liberal Democratic Party is set to implement a temporary tax cut on food consumption and provide annual cash transfers to low- and middle-income households.

Investors remain uneasy over the lack of a clear funding plan, casting a shadow over the Japanese currency's future. The interest rate gap between Japan and other major economies remains substantial, continually fueling carry trades. While the Bank of Japan raised its policy rate to 1% in June, borrowing costs remain substantially lower than other developed economies, reducing demand for the Yen and aiding EUR/JPY.

At the one-hour chart, EUR/JPY stands at 181.71, hovering near the 100-period and 200-period simple moving averages (SMAs). The pair's Relative Strength Index (RSI) sits at 58.16, indicating a constructive position. However, the pair's position remains challenged by a dense Fibonacci resistance structure overhead, implying near-term rebounds are fragile while the price remains below these medium-term averages.

The significant support barrier is at the 23.6% Fibonacci retracement at 181.28, followed by the upward trend-line near 180.88. A deeper decline would expose the structural support level around 179.37.