EUR/JPY climbs toward 173.00 amid persistent Yen weakness

• The EUR/JPY hits a fresh yearly high, holding above 173.00 during the American trading session.
• Japanese Yen under pressure as wide interest rate differentials, import-driven inflation, and political uncertainty weigh on sentiment.
• Eurozone industrial production rebounds strongly in May, rising 1.7% MoM and 3.7% YoY.

The Euro extends its advance for the third consecutive session against the Japanese Yen on Tuesday, with EUR/JPY climbing toward the 173.00 level during the American session -- a level last seen on 12 July 2024. The pair remains underpinned by persistent Yen weakness, as the Yen struggles amid a wide interest rate differential, renewed US tariff threats, and rising import-driven inflation pressures.

Despite inflation staying above its 2% target, the Bank of Japan (BOJ) has been very hesitant to aggressively raise interest rates. Policymakers remain cautious, citing fragile domestic demand and global uncertainties. Compounding the pressure on the Yen, Japan faces growing political uncertainty ahead of the July 20 Upper House elections, where polls suggest the ruling coalition may lose its majority.

This has sparked concerns over fiscal policy direction and limited the BoJ's flexibility, as it seeks to avoid introducing volatility during the sensitive pre-election period. Investors are also factoring in the risk of increased government spending after the election, which could further widen the country's already substantial debt burden. As a result, market sentiment continues to lean against the Yen, allowing EUR/JPY to hold near its highest levels in over a year.

Adding to the Euro's support, Eurozone data released earlier today showed a notable rebound in industrial activity. Industrial production rose by 1.7% month-over-month in May, reversing April's sharp decline of 2.2% and comfortably beating expectations for a 0.9% increase. On a yearly basis, output surged by 3.7%, the strongest pace since early 2023.

Meanwhile, sentiment across the Eurozone showed a modest uptick. The ZEW Indicator of Economic Sentiment rose slightly to 36.1 in July, from 35.3 in the prior month. Though it missed market forecasts of 37.8, the small improvement suggests that investor confidence remains broadly stable.

From a technical perspective, EUR/JPY continues to push higher, trading near the 173.00 mark. The Fibonacci retracement tool, drawn from the July-August 2024 decline, shows that the pair has cleared the 78.6% retracement level at 170.91, which now acts as a key support zone. The daily chart structure remains bullish, with the pair consistently printing higher highs and higher lows.

Momentum indicators reinforce the uptrend, with the Average Directional Index (ADX) rising to 46.42, signaling strong trend strength. However, the Relative Strength Index (RSI) at 75.16 suggests the pair is in overbought territory, hinting at the possibility of a near-term pause or pullback.

If the current bullish momentum persists, EUR/JPY is well-positioned to test the 100% Fibonacci projection near 175.36, the next key upside target. However, given the overbought RSI reading, a short pullback toward the 170.90-171.00 zone cannot be ruled out. This area now serves as the first line of defense for bulls, with deeper support seen around 167.50-168.00. As long as the pair holds above these levels, the broader uptrend remains intact, with dips likely to be viewed as buying opportunities.