EUR/JPY retreats from YTD high with price action falling in a tight range

• EUR/JPY pauses after rising to a fresh YTD high on Wednesday.
• Japan's disappointing Trade Balance and a dovish BoJ remain supportive of EUR/JPY strength.
• EUR/JPY holds above 172.00 as bulls defend support, psychological resistance firms at 173.00

The Euro (EUR) is trading in a narrow range against the Japanese Yen (JPY) on Thursday, after reaching a one-year high of 173.25 on Wednesday. Despite a minor pullback, central bank divergence and a diminishing outlook for Japan's economy remain a key theme.

At the time of writing, EUR/JPY is hovering above the psychological support level of 172.00.

Japan's sluggish trade data and underperformance provide a gloomy outlook for the Yen

Japan released its latest Trade Balance data on Wednesday, which showed that Japan's exports continued to fall as a result of steep tariffs imposed on imports of steel, aluminium and autoparts to the United States (US).

Japan's trade data for June reflected mixed performance, highlighting continued external challenges for the economy. The adjusted merchandise trade balance posted a deficit of ¥-235.5 billion, slightly improved from ¥-291.6 billion previously, while the headline trade balance came in at ¥153.1 billion, missing expectations of ¥353.9 billion and falling sharply from ¥638.6 billion in May.

Exports declined by 0.5% YoY, underperforming forecasts of a 0.5% gain, though an improvement from May's 1.7% contraction.

On the other hand, imports rose by 0.2%, beating expectations of a 1.6% decline and marking a rebound from the prior 7.7% drop. Additionally, foreign bond and equity investments in Japan fell, signaling weaker foreign capital inflows.

Overall, the data suggests soft external demand and weakening trade momentum, which may continue to pressure the Yen, especially as Japan maintains its accommodative monetary policy stance amid global tightening cycles.

The weaker-than-expected Japanese trade data reinforces the bearish outlook for the Yen, supporting continued strength in EUR/JPY. The decline in exports signals soft external demand, while the fall in foreign investment flows suggests diminishing appetite for Japanese assets, both of which weigh on the Yen.

BoJ-ECB monetary policy divergence supports upside potential for EUR/JPY

At the same time, Japan's sluggish trade performance, coupled with a dovish Bank of Japan (BoJ), contrasts sharply with the European Central Bank's (ECB) more cautious stance, where rate cut expectations remain subdued due to persistent inflation.

This monetary policy divergence continues to underpin EUR/JPY's upward trajectory.

EUR/JPY holds above 172.00 as bulls defend support following a fresh YTD tested on Wednesday

After reaching a fresh YTD high of 173.25 on Wednesday, failure to hold above the psychological resistance level of 173.00 allowed bears to drive price action back toward the 172.00 mark.

The current daily candle shows bulls attempting to push prices higher, but the upper wick signals that sellers quickly retaliated, pushing the pair into a narrow range.

If bulls manage to gain traction above 173.00, a break of the 174.00 psych level could open the door for a continuation toward the July 2024 high of 175.43.

On the downside, the 78.6% Fibonacci retracement level of the July-August 2024 move is providing support at 170.93, just above the 20-day Simple Moving Average (SMA). A move lower at a break of the 50-day SMA at 166.78 could then trigger an increase in selling pressure toward the 50% Fibo level at 164.92.

Meanwhile, the Relative Strength Index (RSI) near 69 suggests that the pair is close to overbought territory.