• EUR/JPY recovery from 10-month lows below 177.90 has been capped at 179.75.
• The Yen remains supported on hopes of a hawkish hike by the BoJ next week.
• The Euro bounced up on Thursday as the ECB hiked rates and hinted at further tightening.

The Euro (EUR) retreated below 179.00 against the Japanese Yen (JPY) on Friday, as the mild recovery seen after Thursday’s European Central Bank (ECB) meeting failed to find follow-through above 179.50. The risk-averse sentiment amid the entangled Middle East crisis and investors’ bets that the Bank of Japan (BoJ) will hike interest rates next week are keeping EUR/JPY rallies limited.

Analysts at DBS Group Research argue that “it is almost a done deal that the Bank of Japan will hike rates at the upcoming meeting on Sep 17-18,” pointing to a clear shift in the policy backdrop. In their view, “the most likely outcome is for the BoJ to deliver a hawkish 25bps hike while signalling a flexible pace of rate hikes at future meetings.”

Japanese data released earlier on Friday revealed that factory prices remain at high levels, strengthening the case for immediate BoJ monetary tightening. Producer Price Index (PPI) figures showed a 7.6% year-over-year growth in August, down from the 7.7% reading posted in July but above market expectations of a deeper slowdown, to 7.4%.

In the Eurozone, the ECB raised its benchmark Rate on the Deposit Facility by 25 basis points to 2.5%, as widely expected on Thursday, and President Christine Lagarde left the door open for further rate hikes, as, in her opinion, inflation will remain above the 2% target until “well into 2027.” The Euro appreciated against its main peers following Lagarde’s press conference.

Technical Analysis: A likely dead cat bounce for the Euro

EUR/JPY trades at 179.05, with the rebound from 177.86 lows looking corrective, as the daily Relative Strength Index (14) picks up from heavily overbought levels, following a nearly 4% drop in the last two weeks. The Moving Average Convergence Divergence (MACD) in the same timeframe is well within negative territory, altogether hinting at persistent downside pressure.

Initial support is at the mentioned September 8 low, at 177.86. Further down, there is no clear support until the 127.2% Fibonacci extension of the September selloff, near 175.60. On the topside, any rebound faces immediate resistance at the July 31 high, at 179.55, which held bulls on Thursday. Above here, the next target is the September 4 high, at 182.00.