• EUR/JPY dropped more than 400 pips on Bank of Japan’s widening the bank of yield cap.
• BOJ left monetary policy unchanged, as expected.
• ECB hawks, firmer German data previously favored bulls.
• BOJ Governor Kuroda’s speech will be closely monitored for fresh impulses.

EUR/JPY bears cheer the Bank of Japan’s (BOJ) alteration to yield target during early Tuesday as the cross-currency pair slumped over 400 pips or 2.0%, to 141.90 at the latest.

Bank of Japan (BOJ) kept the benchmark interest rate unchanged at -0.10% and also defended the 10-year Japanese Government Bond (JGB) yield target of 0.0% in its latest monetary policy announcement. However, the central bank’s comments suggesting the increase in the upper line of the Yield Curve Control (YCC) seemed to have lured the Japanese Yen (JPY) buyers.

In this regard, Reuters said, “The Bank of Japan decided on Tuesday to allow long-term interest rates to rise more by widening the band around its yield cap, in a surprise move to address the rising cost of prolonged monetary easing.”

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Previously, the majority of the European Central Bank (ECB) policymakers followed the last week’s hawkish bias of ECB President Christine Lagarde and backed further rate increases, which in turn propelled Euro. Notable among them were Vice-President Luis de Guindos and the ECB board members, Gediminas Simkus and Peter Kazimir.

It’s worth noting that the German IFO Business Climate Index climbed to 88.6 in December versus the previous reading of 86.3 and the forecast of 87.2. Details suggest that the IFO Current Economic Assessment for the nation improved to 94.4 points in the reported month compared to November's 93.1 and 93.5 expected. Further, the IFO Expectations Index – indicating firms’ projections for the next six months, rose to 83.2 in December from the previous month’s 80.0 and against the estimates of 82.0.

Amid these plays, yields rise 11 basis points (bps) to 3.70% whereas S&P 500 Futures reverse initial gains and drop 0.70% intraday by the press time.

Looking forward, EUR/JPY traders should pay attention to BOJ Governor Kuroda’s speech for fresh impulse. Following that, Germany’s Producers Price Index (PPI) for November, expected -2.6% YoY versus -4.2% prior, will be important to watch. Overall, the risk catalysts and hawkish BOJ concerns could weigh on the prices.

Technical analysis

A daily closing below the four-month-old ascending trend line, previous support near 142.45, becomes necessary for the bears to aim for the 200-DMA support close to the 140.00 round figure.