EUR/JPY bounces off multi-week low and climbs back above 159.00, lacks follow-through

• EUR/JPY attracts some buyers on Thursday amid a modest JPY downtick.
• The divergent BoJ-ECB policy expectations keep a lid on any further upside. 
• The cautious market mood also warrants some caution for aggressive bulls.

The EUR/JPY cross stages a modest bounce of over 50 pips from the 158.70 region, or a four-week low touched during the Asian session on Thursday, albeit lacks strong follow-through buying. Spot prices currently trade around the 159.20-159.25 area, and for now, seem to have stalled this week’s retracement slide from the vicinity of the 163.00 round figure. 

The emergence of some selling around the Japanese Yen (JPY) turns out to be a key factor lending some support to the EUR/JPY cross, though the fundamental backdrop warrants some caution before positioning for any further appreciating move. That said, the divergent Bank of Japan (BOJ)-European Central Bank (ECB) policy expectations should help limit the JPY losses and keep a lid on the currency pair. 

The markets have been pricing in the possibility of another BoJ rate hike by the end of this year and the bets were reaffirmed by data showing that real wages in Japan rose for the second straight month in July. Adding to this, BoJ Board Member Hajime Takata said that we must adjust monetary conditions by another gear if we can confirm that firms will continue to increase capital expenditure, wages, and prices.

In contrast, the ECB is almost certain to cut interest rates again in September in the wake of declining inflation in the Eurozone. Apart from this, the cautious market mood might underpin the safe-haven JPY and contribute to capping the upside for the EUR/JPY cross. Hence, it will be prudent to wait for strong follow-through buying before confirming a near-term bottom and positioning for any meaningful upside.