DBS strategist Philip Wee argues that downside risk in EUR/JPY is less straightforward than in CHF/JPY. He notes that Euro (EUR) strength versus the Swiss Franc (CHF) and British Pound (GBP), and an anti-USD trade, support the Euro as markets price in rate hikes from both the European Central Bank (ECB) and Bank of Japan (BoJ). However, he warns EUR/JPY could fall below 180 if the BoJ accelerates normalization.

Euro support but BOJ a risk

“The downside risk in EUR/JPY is less straightforward.”

“First, the EUR and its anti-USD trade could remain supported by the USD debasement theme.”

“Second, strength in EUR/CHF and EUR/GBP provides a synthetic tailwind for the EUR from the European Central Bank’s relatively more hawkish stance compared to its Swiss and British counterparts.”

“Markets are pricing in a 95-100% probability of rate hikes at both Thursday’s ECB meeting and next week’s BoJ meeting.”

“However, JPY may gain the upper hand if the BoJ affirms an accelerated pace of normalization, pushing EUR/JPY below its psychological support at 180.”