Insights 
VT 
Eurozone Sentiment Remains Subdued
Technically, EUR/JPY holds a strong uptrend, finding support near the 21-day EMA at 166.86. The RSI at 71.08 signals robust momentum, though potential short-term pullbacks might occur. A daily close above 170.00 could trigger further gains, while support is likely at 168.20 and 166.86.
EUR/JPY’s recent rally above 170.00 has coincided with softening Japanese macro indicators and continued interest in the single currency, driven in no small part by diverging central bank expectations. The retreat in Tokyo’s June CPI—both headline and core—suggests domestic inflation pressure in Japan is starting to ease, albeit gradually. This undermines the Bank of Japan’s already tentative case for policy tightening. A flat unemployment rate at 2.5% might at first glance offer some reassurance on labour market strength, but when viewed alongside the dip in retail sales, it hints at cautious consumer sentiment. These aren’t indications of a demand-led inflation surge.
Across the channel, Eurozone sentiment remains subdued. The economic sentiment index slipped again, missing forecasts and reinforcing the region’s hesitant growth narrative. Yet, despite the softness, the Euro has fared well—benefiting in part from weakness elsewhere, primarily the Dollar, which has faltered after a stretch of underwhelming inflation and jobs figures in the US. This doesn’t imply that sentiment around the Eurozone is improving, rather that relatively less-bad news and ongoing rate differentials with Japan continue to support the currency pair.
Upside Potential and Technical Support Levels
Markets appear comfortable holding long EUR/JPY positions, as signalled by the pair’s ability to stay well-above the 21-day exponential moving average. The strength in the RSI around 71 tells us that momentum remains firmly in favour of the bulls. While these levels lean towards overbought territory from a momentum perspective, there is no strong sign yet of reversal.
We expect short-term fluctuations, particularly if macro surprises tilt expectations for either central bank. That said, unless incoming data sharply changes the narrative or yields snap in a meaningful way, downside appears limited to the technical floors around 168.20 and 166.86. Those levels are being respected for now, with dips into them being used as entries rather than exits.
From a volatility standpoint, we’ve noticed tighter price action leading up to this breakout which had previously kept implied ranges relatively subdued. Now, post-breakout behaviour suggests more room to the upside, particularly if 170.00 begins acting as a base rather than a ceiling. Traders engaging in delta-neutral strategies may wish to remain vigilant on upside skew, as call interest has gained against a backdrop of firm spot movement.
We interpret the correction in Japanese inflation and cooling in consumer activity not as a one-off, but rather a trend that may deepen if policy remains passive. Meanwhile, Eurozone data, while uninspiring, still supports a narrative of less dovishness compared to Tokyo. That dynamic should not be ignored. There remains a premium on carry strategies in this cross, and barring any surprise change by the Bank of Japan, it’s hard to make a case against continued yield-driven buying.
Attention should stay on how 170.00 is treated in the coming sessions. If it holds, option markets could begin pricing in higher end-of-summer ranges, pushing up breakevens on the topside. Spot call ladders and low-delta call spreads have already started to reflect this conditioning. There may be merit in positioning so as to take advantage of skew while managing downside with moderate vega exposure, particularly through late July and early August expiries.
We remain attentive to incoming central bank guidance, especially any indication from Japan of tighter policy. However, as it stands, the data does not favour that route. Rather, the recent inflation miss and tepid consumption lend support to continuation of the yield differential story, reinforcing the long bias in the cross.
