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Buy the Dip? EUR/JPY Slides but Euro Strength Remains Supported by Policy Fundamentals
Summary:
The EUR/JPY pair retreats from recent highs as traders assess central bank divergence, revived but fragile U.S.–China trade talks, and weak Japanese economic data. Market focus shifts to ECB’s Schnabel for forward guidance.
Trading
163.604
ENTRY
164.900
TGT
162.500
SL
163.325 -0.477 -0.29%
0
Point
Flat
162.500
SL
CLOSING
163.604
ENTRY
164.900
TGT
The euro slipped against the Japanese yen on Friday, with the EUR/JPY pair trading around 163.45, down 0.20%, as risk sentiment cooled and market participants turned cautious ahead of a key speech by European Central Bank (ECB) policymaker Isabel Schnabel. The pullback comes after the pair briefly tested resistance at 163.94, only to reverse amid a convergence of geopolitical, monetary, and macroeconomic forces.
While the broader trend for the euro remains supported by the stark monetary policy divergence between the ECB and the Bank of Japan (BoJ), near-term jitters over global trade tensions and soft Japanese data have tempered the bullish momentum. Markets are recalibrating expectations as the euro faces conflicting cues: hawkish ECB rhetoric on one hand, and growing global uncertainty on the other.
A key driver of the broader risk mood this week has been the rekindled dialogue between the United States and China, with high-level trade negotiations set to take place in Switzerland this weekend. U.S. Treasury Secretary Scott Bessent and Trade Representative Jamieson Greer are scheduled to meet their Chinese counterparts—a development that initially boosted risk appetite and lent support to EUR/JPY's upside.
However, that optimism was quickly diluted after former President Donald Trump—now a leading candidate in the upcoming election—muddied the waters by proposing an 80% tariff on Chinese imports, a proposal that, while lower than the current effective tariff rate of 145%, injects fresh uncertainty into an already fraught U.S.–China trade relationship.
This tariff saber-rattling has pushed investors back into safe-haven assets like the Japanese yen, traditionally favored during times of heightened geopolitical uncertainty. Nonetheless, the yen’s gains have been modest, as its appeal continues to be undermined by the BoJ’s unwavering commitment to ultra-loose monetary policy.
Investor caution is also being driven by the upcoming speech by Isabel Schnabel, a known hawk on the ECB Governing Council, who is set to speak at the Hoover Institution’s Monetary Policy Conference. Traders are watching closely for clues about the ECB’s rate path, particularly as the market gears up for a possible 25 basis point rate cut in June.
Despite signs of a pivot, ECB officials have stressed that policy decisions remain data-dependent, and recent comments have suggested the central bank is not yet ready to declare victory over inflation. Any hawkish tone from Schnabel—especially against the backdrop of continued economic strength in parts of the euro area—could reignite euro bullishness and strengthen EUR/JPY in the medium term.
By contrast, the Bank of Japan remains staunchly dovish. Governor Kazuo Ueda and his team have shown no urgency to tighten policy further after their historic March rate hike. With inflation still tepid and domestic consumption weak, Japanese officials have repeatedly emphasized patience, reinforcing the euro’s relative advantage.
Friday’s Japanese data release offered little to bolster yen bulls. The Coincident Index, which tracks current economic conditions, declined to 116.0 from a revised 117.3, underscoring sluggish domestic momentum. Meanwhile, the Leading Economic Index came in at 107.7, a modest beat relative to expectations (107.5) but down from the previous reading of 108.2, suggesting a softening outlook for future activity.
The weak print aligns with the broader narrative of Japan’s economic malaise, keeping pressure on the BoJ to maintain its easing bias. Inflation, wage growth, and business investment all remain tepid, and without a credible uptick in price pressures, the central bank is likely to remain sidelined for now.
Technical Analysis
From a technical perspective, EUR/JPY recently broke above the 163.25 barrier, climbing to a high of 163.90, but failed to sustain gains, encountering resistance just shy of 164.00. The pair is now consolidating below 163.50, with intraday support seen near 163.00 and a more critical base at 162.65.
Should the Euro manage to defend this support zone and regain upside momentum, a bullish breakout toward 164.20 could be in play, with a potential retest of the key 164.90 resistance zone. However, failure to hold above 162.65 could signal a shift in short-term sentiment and expose the pair to deeper corrections.
Momentum indicators remain mixed, suggesting that while the broader trend remains bullish due to monetary policy divergence, the pair may continue to trade sideways in the near term as markets await policy clarity.
TRADE RECOMMENDATION
BUY EURJPY
ENTRY PRICE: 163.60
STOP LOSS: 162.50
TAKE PROFIT: 164.90
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Warren Takunda, a seasoned finance leader specializing in the Middle East, is a trusted senior analyst with a proven track record. As head of the finance team, he excels in financial planning, analysis, and reporting. Warren's expertise in financial modeling and investment analysis delivers valuable insights to clients.
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