EUR/JPY traded with mild gains around 172.50 in Thursday’s Asian session, snapping a four-day losing streak. The pair has been closely monitored by forex traders as it responds to a combination of Japanese political uncertainty and the upcoming European Central Bank (ECB) rate decision. 

Market participants are approaching the pair cautiously, balancing geopolitical risks in Japan against the stable monetary outlook in the Eurozone. Readers will find a full breakdown of the topic by Arbitics brokers in this article.

The recent modest recovery comes after EUR/JPY touched a multi-session low earlier in the week, reflecting profit-taking and short-term technical support levels. The Asian session often sets the tone for European trading hours, and the cross’s behavior near 172.50 suggests traders are positioning ahead of potential volatility from the ECB announcement.

Japanese Political Uncertainty Weakens the Yen

A major driver for EUR/JPY gains has been political developments in Japan. Japanese Prime Minister Shigeru Ishiba announced his resignation over the weekend, triggering uncertainty over the next leadership and potential economic policies.

Market analysts suggest that the appointment of a new Prime Minister could give the Bank of Japan (BoJ) added room to delay interest rate hikes. A new administration may prioritize economic stability and debt management over rapid monetary tightening, which could keep borrowing costs low and weaken the Japanese Yen (JPY).

The uncertainty surrounding Japan’s leadership transition is acting as a tailwind for EUR/JPY, supporting the cross amid otherwise modest market momentum. Historically, the JPY is sensitive to political instability, and investors often seek risk-adjusted positions in safe-haven currencies, although in this case, EUR/JPY benefits from Yen weakness rather than Euro strength.

ECB Rate Decision in Focus

Across Europe, the ECB is expected to hold rates steady at its September meeting. Despite hawkish remarks from ECB President Christine Lagarde in July, the central bank is likely to maintain a “wait-and-see” approach as inflation remains broadly in line with the ECB’s 2% target.

Traders anticipate that the ECB will focus on forward guidance and set the stage for potential rate cuts in December, rather than taking immediate action. This has kept the Euro relatively stable, with market participants preferring to position for gradual monetary easing later in the year.

The ECB Press Conference following the policy announcement is expected to provide clarity on economic projections, inflation forecasts, and policy intentions, which will be critical for EUR/JPY’s short-term trajectory.

Impact of Lagarde’s Comments

Christine Lagarde’s hawkish comments in July reduced expectations of near-term rate cuts, but the Euro’s movement remains vulnerable to any dovish signals. If ECB officials hint at future monetary easing, it could exert downward pressure on the Euro, potentially offsetting gains from JPY weakness.

Market forecasts indicate that Eurozone inflation could fall below 2% next year, which may reopen discussions about monetary stimulus. Traders are closely watching communication from ECB policymakers to gauge whether the Euro could experience short-term volatility despite the central bank’s neutral stance.

Technical Analysis of EUR/JPY

From a technical perspective, EUR/JPY is consolidating near 172.50, a level that may act as short-term support. Four-day declines have been interrupted, signaling a potential trend reversal or at least a pause in bearish momentum.

Resistance levels for the cross are observed around 173.00–173.20, where selling pressure could emerge if the Euro encounters a dovish ECB reaction. On the downside, 171.50–171.30 may provide key support, reflecting prior Asian and European session lows.

Technical indicators suggest a mixed bias, with short-term momentum favoring buyers while longer-term indicators remain neutral. Traders are likely to watch intraday candlestick patterns, moving averages, and volume trends to gauge whether the modest gains can sustain into European and US trading sessions.

Outlook for EUR/JPY

Going forward, EUR/JPY is expected to remain sensitive to both ECB and BoJ developments. In Japan, political uncertainty continues to weigh on the JPY, creating potential for further upside in the cross if leadership transitions delay monetary tightening.

In the Eurozone, the ECB’s steady stance will likely maintain the Euro’s current levels, though unexpected dovish commentary could trigger short-term pullbacks. For traders, the 172.50 level will remain a reference point, with breakouts above or below signaling potential trend continuation or reversal.

Conclusion

In summary, EUR/JPY posted modest gains near 172.50, driven primarily by Japanese political uncertainty and anticipation of the ECB’s rate decision. While the BoJ’s potential delay in rate hikes provides support for the cross, the Euro’s performance will depend heavily on ECB guidance and communication.

Traders are advised to monitor Asian session price action, Japanese political developments, and the ECB Press Conference, as these factors will determine the short-term direction of EUR/JPY.