EUR/JPY Correction Ahead of European PMI Data

Market Overview

The Bank of Japan (BOJ) maintained its key interest rates unchanged last week, indicating no urgency to hike rates further. This decision came just days after the Federal Reserve’s 50-basis-point rate cut, which temporarily slowed the yen’s sharp gains in September, during which it appreciated by 1.4%. With Japan observing the Autumn Equinox holiday, the key focus in Monday’s trading session shifts to the PMI releases from major European economies, the UK, and the US.

For the yen, upcoming political developments in Japan, including the ruling party’s vote to select a new prime minister, could complicate the BOJ’s outlook. The potential for early elections in late October poses a dual risk for the yen, as it could diminish expectations of further rate hikes and steepen Japan’s bond curve, leading to additional downward pressure on the currency.

Technical Analysis

EUR/JPY has been in an upward trend on the hourly chart since September 16. However, it seems this trend is facing headwinds as the pair encounters significant resistance at 161.185. This is the second failed attempt by buyers to push through this level, signaling mounting selling pressure. Currently, the pair is trading between the 161.185 resistance and immediate support at 160.359.

The compression of Bollinger Bands following a recent bulge suggests that bullish momentum is weakening. The price slipping into the lower half of the bands, along with RSI divergence, reinforces the likelihood of buyers losing control. Should sellers successfully break below the 160.359 support, the next targets could be 160.017, 159.849, and 159.533.

Oscillator Confirmations

RSI: Indicates overbought conditions, signaling potential for further downside.

MACD: Mixed signals with weakening bullish momentum, suggesting the possibility of a correction.

Moving Averages: Also showing mixed behavior, reflecting indecision in the market.

Alternative Scenario

If buyers can hold the 160.359 support level, the pair could enter a consolidation phase. A resumption of the bullish trend would require a decisive break above the key resistance at 161.185, which could reignite upward momentum.

Key Levels Overview

• Resistance Levels:
  • Resistance 1: 161.185
  • Current Price: 160.450
• Support Levels:
  • Support 1: 160.359
  • Support 2: 160.017
  • Support 3: 159.849
  • Support 4: 159.533

Key Events to Watch

The market’s attention will be focused on the wave of European PMI data scheduled for release. The PMIs for Germany, France, and the Eurozone are crucial for gauging the economic health of these regions. Weaker-than-expected figures could exert downward pressure on the euro. Additionally, on Tuesday, Japan’s Services PMI will be released, which is expected to remain in contractionary territory, below the 50 threshold.

Conclusion

EUR/JPY faces selling pressure after failing to break the 161.185 resistance. Technical indicators suggest waning bullish momentum, and a break below the 160.359 support could lead to further declines toward 160.017 and lower. Market participants should closely monitor European PMI data, as weaker-than-expected numbers could weigh further on the euro and accelerate the pair’s correction.