EUR/JPY clings to gains above 118 supported by upbeat sentiment

• Risk-on flows continue to dominate markets on Monday.
• Investor confidence improves in the euro area in September.
• European Central Bank is expected to announce a rate cut on Thursday.

The EUR/JPY pair snapped its five-week losing streak last week and gained more than 100 pips. With the upbeat market sentiment on Monday making it difficult for the safe-haven JPY find demand, the pair extended its rally and rose to a daily high of 108.53 before going into a consolidation phase in the American session. As of writing, the pair was up 0.41% on the day at 118.37.

Easing worries over the potential impact of a slowdown in the Chinese economy on the global economic growth seem to be helping the risk-appetite remain strong on Monday. Earlier today, reports of China’s central bank looking to cut the required reserve ratio (RRR) one more time before the end of the year showed China’s commitment to jump-start the economy.

Meanwhile, today’s data from the eurozone showed that investor sentiment is expected to improve in September with the sentix Investor Confidence rising to -11.1 from -13.7 in August and coming in better than the market expectation of -14.

“In September, the economic situation in Euroland remains tense. The sentix overall economic index remains weak at -11.1 points, although it rises by 2.6 points,” sentix said in its press release. “This is due to a clear recovery of the expected values to -12.8. The assessment of the situation, on the other hand, is still falling to -9.5 points. The eurozone thus remains close to a recession.”

Key event of the week: ECB meeting

Later this week, investors will be paying close attention to the European Central Bank (ECB) monetary policy announcements. Although it looks like the markets have already priced in a 10 basis point rate cut, changes to the forward guidance and a potential re-introduction of the quantitaive-easing (QE) could trigger a sharp market reaction.

Previewing the ECB meeting,    “We continue to see the ECB starting a final monetary firework at this week’s meeting: a 20bp rate cut of the deposit rate, a small tiering system, a repricing of the TLTROs and a restart of QE with some 30 billion euro per month,” said Carsten Brzeski, chief economist at ING. “Even though there is the risk that the hawks’ opposition could lead to a delay of QE.”

Technical levels to watch for