EUR/JPY below 158.00 at multi-year highs, upside potential seems intact

• EUR/JPY attracts some buying at lower levels on Thursday, though it lacks continuation.
• The divergence between the policies of the ECB and the Bank of Japan continues to favor the cross.
• On the daily chart, the RSI remains in the overbought zone and limits gains.

The crossing USD/JPY reverses an intraday drop in the 157.25-157.20 zone on Thursday and returns to close to its highest level since September 2008 played the day before. However, the pair pulls back a few pips during the first part of the European session and remains below the 158.00 levelalthough the fundamental background seems to be leaning firmly in favor of the bulls.

Despite intervention fears, the Japanese Yen (JPY) continues its relative underperformance on the back of a more dovish stance taken by the Bank of Japan (BoJ), which turns out to be a key factor supporting the EUR/JPY cross. It should be remembered that the Japanese Minister of Finance, Shunichi Suzuki, stated earlier this week that they would watch the forex market with a sense of urgency. and that they would respond appropriately if currency movements became excessive. The warning was echoed by Japan’s top currency diplomat, Masato Kanda, though he failed to attract significant buying around the yen as it investors seem convinced that the Bank of Japan’s negative interest rate policy will continue at least until next year.

On the other hand, the governor of the BoJ, Kazuo Ueda recently ruled out the possibility of any changes to the ultra-loose policy setup and noted that there are no immediate plans to alter the yield curve control measures. By contrast, the President of the European Central Bank (ECB), Christine Lagarde, cemented market expectations of a ninth consecutive rise in July. In her intervention at the central banking event in Sintra (Portugal), Lagarde said that inflation in the euro area is too high and will remain so for too long. This, in turn, raised expectations for more ECB rate hikes this yearwhich in turn is seen as acting as a tailwind for the common currency and supporting the prospects for a further short-term move higher for EUR/JPY.

That being said, the Relative Strength Index (RSI) on the daily chart remains in overbought territory and makes it prudent to wait for some near-term consolidation or a modest pullback before opening any further bullish positions. However, the aforementioned fundamental background suggests that the path of least resistance for EUR/JPY is to the upside. Therefore, any significant corrective decline could still be seen as an opportunity for bulls and it is more likely that it will remain limited.

EUR/JPY technical levels to watch