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EUR/JPY Surges as ECB Hikes Interest Rates by 50bps

The EUR/JPY extended its surge on Thursday, gaining 1.2% after the European Central Bank (ECB) surprised the markets with a 50bps rate hike. In delivering the first rate hike in over a decade, the ECB surpassed market expectations that had forecast a 0.25% increase in interest rates. 

In announcing the rate hike, the ECB said in its statement that the Governing Council took the decision to abandon its negative interest rate regime to bring inflation back to its 2% target over the medium term. Furthermore, the ECB said it reassessed the inflationary trend and decided to hike more than it signalled in its last meeting while also approving the Transmission Protection Instrument (TPI).

The bank also signalled that it would transit to a meeting-by-meeting approach to interest rate decisions while maintaining a data-dependent approach to future monetary policy action. As a result, all three key ECB interest rates, including the Main Refinancing Rate, were raised by 0.5%. 

The surge in the EUR/JPY following the ECB decision also got support from the earlier reiteration of dovish monetary policy by the Bank of Japan on Thursday, cementing the weakness of the Japanese Yen against the Euro US Dollar and other currencies with divergent interest rate positions. The press conference by the ECB Chair Christine Lagarde follows and could produce more volatility. 

EUR/JPY Outlook

The pair is now challenging the 142.058 resistance (7 June high), and a break of this price barrier clears the pathway toward 144.114 (8 June and 21 June 2022 highs). A break above this price mark re-established the uptrend, creating a path to additional harvest points for the bulls lie at 145.683 (31 December 2013 high) and 147.222, the site of the high seen on 26 December 2014.

On the flip side, rejection at 142.058 could initiate a pullback that challenges the downside pivot at 139.461 (13 June and 18 July 2022 lows). A breakdown of this support targets 138.125 (14 July 2022 low). Additional downside targets at 136.581 (2 May 2022 low) and 135.056 (25 May 2022 low) will become new harvest points for traders trying to profit from the retracement correction. 

EUR/JPY: Daily Chart