EUR/JPY Forecast: Bounces After Fall

• EUR/JPY saw early weakness before stabilizing in choppy trade, with interest rate differentials still favoring the euro.
• Ongoing BOJ bond-market pressures and Japan’s long-term loose-policy outlook suggest buying dips toward potential gains up to 185.

On Thursday, the euro initially fell against the Japanese yen in what would end up being a fairly choppy trading session. This probably isn't a huge surprise due to the uncertainty of the global financial situation and the circumstances that we find ourselves in. But at the same time, you can also make an argument that the real story here is probably the Japanese yen and what happens next. After all, the Bank of Japan finds itself fighting the bond market at the moment with yields rising, but it's also worth noting that the market is going to continue to be very noisy and driven by interest rate differentials.

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Euro Advantage in Rate Differential

The interest rate differential, is favoring the euro, and I think it probably will for some time as we continue to see whether or not the euro stays stable from an interest rate decision standpoint. I think the consensus at the moment is that it most certainly will. And therefore, it makes sense that we continue to rise against the Japanese yen, which, despite the problems that they are having with the bond market, the reality is it's probably only a matter of time before the Japanese have to start buying their own bonds again.

Yes, there's been a little bit of inflation, but the structural situation in Japan continues to favor loose monetary policy from the long-term perspective. So, with that, I think you have a scenario where you continue to buy the dips, and it's probably worth noting that the 180 yen level below is a bit of a floor in the market with the 50-day EMA reaching there pretty soon. Over the next several weeks, we could see a push towards the 185 yen level, and at this point, I have no interest whatsoever in shorting this pair.

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