Until recently, the Bank of Japan and the ECB were the last in line to normalize monetary policy. Few expected them to start curtailing monetary stimulus. However, the improvement in the epidemiological situation in the eurozone, the rapid recovery of its economy, and most importantly, the acceleration of inflation to maximum levels since 2011 allowed the officials of the European Central Bank to talk about a decrease in monthly asset purchases under the emergency program by €1.85 trillion. As a result, EUR/JPY quotes jumped to the very peak since mid-July. Will the rally continue? The answer to this question is largely up to Christine Lagarde. In any case, the pair deservedly claims to be the most interesting on Forex this week by September 10.

There is indeed a lot in common between the eurozone and Japan. And it's not just about monetary policy. In autumn, parliamentary elections will be held in Germany and Japan. At the same time, the departure of Prime Ministers Angela Merkel and Yoshihide Suga from their posts further unites the regions. The victory of the German Greens, who are pushing for more fiscal stimulus, and reformist former Foreign Minister Taro Kono, could re-energize capital flows to Europe and Asia while strengthening the euro and the yen. By the way, the Japanese yen, along with the Norwegian krone, is the most undervalued G10 currency based on the real effective exchange rate.

Deviation of G10 Currency Rates from Fair Value

Large banks look at the political factor differently. Bank of America believes that electoral uncertainty, growing mergers, and acquisitions, and the creation of a fund to fund university research on COVID-19, which will lead to a negative underlying balance of payments, will drive USD/JPY quotes towards 116. JP Morgan, by contrast, advocates the strengthening of the yen against the US dollar due to the reluctance of Japanese investors to place money outside the country and an increase in demand from non-residents for shares and bonds issued in Japan.

Whatever it was, the further fate of EUR/JPY will be decided by the ECB and the American securities market. The growth of the euro for two weeks in a row is due to expectations of a decrease in the volume of monthly asset purchases within the framework of the PEPP, however, there is no talk of curtailing monetary incentives. And if Christine Lagarde emphasized this fact at a press conference following the results of the September meeting of the Governing Council, a sale of the pair may begin against the background of profit taking on longs. Ultimately, both the European Central Bank and the Bank of Japan remain ultra-soft.

Dynamics of the balance sheet of the Bank of Japan

A weak report on US employment allowed the leading indicator from the Atlanta Federal Reserve to reduce the forecast of US GDP growth for the third quarter to less than 4%. The factor of strong corporate profits has already been played back, and if there are problems with the adoption of fiscal incentives from Joe Biden by Congress, the S&P 500 will finally go to correction. This will be good news for the yen.

Technically, the EUR/JPY rebound from the resistances at 130.9 and 131.9 is a reason to sell the pair.

EUR/JPY, Daily chart