EUR/JPY steadies near record high as Euro and Yen face political shocks

• The Euro declines following the surprise resignation of French Prime Minister Sébastien Lecornu, after touching a record high.
• France’s political crisis revives concerns over Eurozone stability.
• The Japanese Yen remains under pressure after Sanae Takaichi’s victory in Japan’s Liberal Democratic Party leadership race.

EUR/JPY stabilizes around 175.70 on Monday, up 1.4% for the day, after reaching a record high of 176.25. The unexpected resignation of French Prime Minister Sébastien Lecornu, announced just hours after unveiling his new cabinet, shocked markets and weighed on the single currency.

This resignation –the fifth in less than two years– plunges France into another phase of political instability. President Emmanuel Macron faces growing calls from both right and left-wing opposition parties to dissolve the National Assembly and call early parliamentary elections. Analysts at Scotiabank highlight that, “The euro area government Bond market has also responded, lifting yields for all of the major members while widening key differentials (Italy-Germany, France-Germany) in a manner that marginally reflects renewed concerns about fiscal fragmentation”.

Economic data released on Monday offered little support to the Euro. Eurozone Retail Sales rose by just 0.1% in August, following a revised 0.4% decline in July. European Central Bank (ECB) Governing Council member José Luis Escrivá stated that inflation expectations remain firmly anchored at 2%, adding that current interest rates are appropriate. A comment that helped the Euro limit further losses.

Meanwhile, the Japanese Yen falls sharply, influenced by political developments in Tokyo. The election of Sanae Takaichi as the new leader of the ruling Liberal Democratic Party revived expectations of a more dovish policy stance. According to a BHH report, the probability of a Bank of Japan (BoJ) rate hike at the October 30 meeting has fallen to 25%, from around 60% previously.

Despite short-term headwinds, analysts at Société Générale note that the long-term uptrend in EUR/JPY remains intact as long as the pair holds above the 175.00/174.70 support area, with potential upside targets at 177.60 and 178.80.

EUR/JPY technical analysis: Bullish bias prevails above 175.00

EUR/JPY 4-hour chart. Source: FXStreet.

EUR/JPY marked a new high at 176.25 on Monday, surpassing the 2024 peak at 175.43. During the Asian session, the currency pair marked a new high in response to the political shock in Japan, before quickly retreating in the face of the political shock in France.

However, EUR/JPY is holding above the 175.00 area that blocked the pair's advance on September 26 and 29, and is now acting as support. As long as the price remains above 175.00, EUR/JPY could maintain a bullish bias, leading to a retest of the 176.25 peak.

On the downside, a pullback below 175.00 could encourage a stronger correction, leading to a closing of the bullish gap at 173.14.