EUR/JPY steadies near 169.00 as traders await the next catalyst.

EUR/JPY holds firm near 169.00 with the 170.00 psychological level currently holding bulls at bay.
The Euro benefits from the return of risk-on sentiment, but momentum indicators suggest that the pair may still be overbought.
The safe-haven Japanese Yen struggles against its G10 counterparts, with Japan’s low-interest rate environment limiting its gains.

The Euro (EUR) is experiencing a modest pullback against the Japanese Yen (JPY) on Thursday, after surging over 3% this month.

EUR/JPY is trading slightly below the 169.00 mark, with Thursday’s low of 168.56 providing imminent support at the time of writing.

With bulls still eager to retest the next big level of resistance at the 170.00 psychological level, both technical and fundamental factors are playing a role in determining the pair’s next move.

The recent boost in optimism that has pushed the Euro to multi-year highs against a wide range of currencies is showing signs of slowing. For EUR/JPY, the Relative Strength Index (RSI) on the daily chart is above 68, suggesting that the pair is still threatening overbought territory.

However, bearish momentum would need to show positive signs of building before the trend can reverse.

Fundamentally, risk sentiment has eased following the Israel-Iran ceasefire that was confirmed on Tuesday. This has placed the Japanese Yen on the backfoot against its G10 counterparts.

With risk-aversion fading and both Japan and the European Union (EU) pushing for a trade deal with the United States before the July 9 deadline, interest rate differentials remain in favour of Euro strength.

EUR/JPY daily chart

If EUR/JPY rises above 170.00 and geopolitical tensions continue to ease, the 78.60% Fibonacci retracement level of the July-August decline could come back into play at 170.93.

A break of this level and a resilient Euro would then potentially open the door for a move toward the longer-term resistance barrier at 175.43, aligning with the July 2024 high.

In contrast, a resurgence in Middle East tensions or increased potential for the Bank of Japan to hike rates may place bearish pressure on the pair. A clear move below 169.00 could then see prices retest the 10-day Simple Moving Average (SMA) at 167.84.

The next layer of support rests at the 61.80% Fibonacci retracement of the aforementioned move at 167.40, paving the way for a move toward the 20-day SMA at 166.20.