EUR/JPY is holding strong above the 170.00 level, with investor confidence waning on potential rate cuts by the ECB. While the ECB is expected to start reducing interest rates from the June meeting, policymakers are comfortable with market expectations for a rate cut despite higher Q1 Negotiated Wage Rate data. However, ECB board member Joachim Nagel believes that the impact of wage growth is limited and is a lagging indicator, with long-term trends expected to remain soft.
Investor focus has now shifted to the July meeting, where they anticipate policymakers will assess the impact of the rate cut in June on the economy before making any further moves based on incoming data. ECB policymakers have not committed to any subsequent rate-cut actions, emphasizing a wait-and-see approach. ECB Governing Council member Isabel Schnabel warned of the potential consequences of an aggressive rate-cut cycle, acknowledging a decline in price pressures but noting persistent factors such as domestic and service inflation.
On the other hand, the Japanese Yen remains weaker as doubts persist regarding the Bank of Japan’s capacity for further policy tightening. Japan’s National Consumer Price Index (CPI) report revealed a second consecutive month of inflation decline, with price pressures still above the 2% target but insufficient to warrant a rate hike. The latest economic assessment report by Japan’s Cabinet Office for May maintains a status quo on economic prospects for the third consecutive month.
Overall, the EUR/JPY pair’s strength above 170.00 is driven by uncertainties surrounding ECB rate cuts beyond June, as well as doubts about the BoJ’s ability to tighten policy further. Investor sentiment remains cautious as they await developments in central bank policies and economic data to guide their trading decisions. The upcoming meetings of the ECB and BoJ will be closely monitored for any signals of future policy actions, with expectations of a cautious and data-driven approach from both central banks.
