EUR/JPY pares losses after BoJ-driven plunge but more downside likely

After the Bank of Japan’s (BoJ) decision early Thursday to refrain from implementing additional monetary easing measures, the yen surged sharply against its global counterparts, including the US dollar, euro, and pound. Among the most pronounced of these yen-driven moves occurred with the EUR/JPY currency pair, which had already been heavily pressured since at least the beginning of June amid increasing concerns of a Brexit, or a UK exit of the European Union.

As world markets await the outcome of the UK’s EU referendum one week from now, the euro, along with the pound, has been volatile and generally weighed down, while the yen has benefited from its status as a safe haven currency ahead of next week’s formidable risk event. The yen has been consistently strengthening this month despite the specter of possible measures by Japan’s central bank in attempts to stem the rise of its currency. As it currently stands, this possibility, at least for the time being, has been set aside with the BoJ’s inaction. This has opened the way for even further potential yen strength, at least until the outcome of the EU referendum is known.

While the yen has essentially been given a free ticket to continue its rise until that time, however, if a Brexit outcome actually prevails and the safe haven yen surges much more in response, Japan could very well be in the position to intervene in attempts to drive down its currency. If successful, this could give a substantial boost to EUR/JPY, which could interrupt its currently strong bearish trend.

Before that possible scenario, though, the run-up to the referendum within the next week could likely see additional pressure on the euro and strength for the yen, which could open the way to significantly further losses for EUR/JPY. Thursday’s BoJ-driven plunge for the currency pair prompted a clean breakdown below the key 119.00 support level, which had previously been a key downside target since early June. As of Thursday, the breakdown followed through to hit its next downside target at 116.00 support, establishing yet a new three-year low, before rebounding and paring some of those losses.

With any re-break and sustained trading below 116.00, the next major downside targets are at the 114.00 and 111.00 support levels. After the referendum, trading direction and levels will be dependent upon both the actual outcome of the vote as well as possible actions by Japan if a pro-Brexit result prevails and the yen strengthens substantially in response.

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