Ella 
The EUR/JPY cross rebounded nearly 130 points from the Asian session low near 161.70, and recently soared to a new intraday high due to new selling near the Japanese yen (JPY). EUR/JPY is currently trading around the 163.00 mark, with bulls now looking for renewed strength following a strong rebound from one-week lows in the 160.40 area overnight.
Prime Minister Fumio Kishida’s decision to step down casts uncertainty over Japan’s political future and could hamper the Bank of Japan’s (BoJ) plan to steadily raise interest rates from near zero. This, along with underlying strong bullish sentiment in global stock markets, is seen as a key factor weighing on the safe-haven yen and boosting the EUR/JPY cross.
Still, the risk of further escalation in geopolitical tensions in the Middle East could dampen market optimism. In addition, new data from Japan showed that macroeconomic conditions are improving, which will prompt the Bank of Japan to raise interest rates again later this year. This, coupled with the ECB maintaining a dovish outlook, should limit gains in the EUR/JPY cross.
In fact, with the Eurozone inflation rate declining and the economic outlook pessimistic, the market has been betting that the European Central Bank may cut interest rates again. A speech overnight by Finnish Bank Governor and European Central Bank policymaker Oli Rehn confirmed this speculation again. Rehn said that given the continued weakness in the economy, the ECB may need to cut interest rates again in September.
Therefore, it would be prudent to wait for strong follow-through buying before taking a position on the recent resumption of a solid recovery from the yearly lows in the 154.40-154.35 area hit earlier this month. Investors are now looking forward to the final reading of Eurozone inflation, which could impact the euro and create some short-term trading opportunities in the EUR/JPY cross.
