Japanese Yen: Policy delay risks weakness against US Dollar - Commerzbank

The EUR/JPY currency pair remained relatively unchanged at around 180.25 during Monday's early trading hours in Europe. Japanese markets were on holiday for three days, resulting in a low liquidity environment. Traders were highly vigilant for potential currency interventions by Japanese authorities to support the volatile currency.

The Bank of Japan (BoJ) had recently increased its policy rate by 25 basis points to 1.25%, the highest level since 1995, but this move failed to impress the markets and put downward pressure on the Japanese Yen (JPY) compared to the Euro (EUR). Swaps markets priced the likelihood of a rate hike at the BoJ's October meeting at less than 20%, with a 90% chance of a rate increase at the December meeting.

According to the Nikkei newspaper, Japanese officials conducted rate checks, which involve asking banks for currency quotes to gauge market conditions and are seen as a potential precursor to intervention. The European Central Bank (ECB) President, Christine Lagarde, stated that any further interest rate hike by the ECB would depend on future conditions, adding that a rate cut is highly unlikely at the moment.

Economists at DBS noted that markets were already anticipating additional rate hikes, with a second hike expected in December and a third hike by April, leaving the JPY vulnerable if the BoJ does not meet expectations. DBS cautioned that a less hawkish policy stance could trigger resumption of JPY selling pressures, considering the extent of tightening already embedded in market expectations.

At the same time, DBS argued that the BoJ was raising rates from a position of deeply negative real rates and that with inflation pressures on the horizon due to energy shocks, Governor Ueda might reinforce a vigilant stance and signal the possibility of further near-term hikes. The EUR/JPY pair maintained a bearish outlook in the daily chart, trading below the Bollinger middle band and the 100-day Simple Moving Average (SMA).

This positioning suggested that rallies would remain corrective within a broader topping phase, while the Relative Strength Index (RSI) of 41.7 remained below the 50 line, indicating still-diminishing bullish momentum despite recent stabilization off the lows. The next significant resistance level is at the Bollinger middle band near 181.55, with a stronger cap at the 100-day SMA around 184.18 and the upper Bollinger band near 187.45 if buyers manage a deeper recovery.

Conversely, the next notable support lies at the lower Bollinger band around 175.60, a break of which could lead to an extension of the current bearish trend.