Euro recovers some early losses against Japanese Yen, ECB policy in focus

The Euro (EUR) claws back some of its early losses against the Japanese Yen (JPY) during the European trading session on Tuesday. At press time, EUR/JPY is down 0.3% to near 178.85 even after recovering from its intraday low of 177.85.

The outlook of the pair remains bearish as market experts see a strong Japanese Yen’s outlook amid expectations that the Bank of Japan (BoJ) will extend its monetary tightening cycle even after hiking interest rates at the policy meeting next week.

Yen support builds as markets price rapid BoJ tightening

Analysts at Commerzbank highlight that “an interest rate hike next week is now priced in at roughly 96%, and the market expects further hikes to follow quickly thereafter,” underscoring how swiftly expectations have shifted.

In Commerzbank’s view, “as long as expectations continue to shift in such a hawkish direction, the yen should have little trouble appreciating further,” with the currency seen as well positioned to benefit from this increasingly aggressive policy path.

On the Euro front, financial markets keenly await the European Central Bank’s (ECB) interest rate decision on Thursday. Experts seem confident that the ECB will hike interest rates in the policy meeting, but warn that moderate Eurozone economic growth and higher energy prices would complicate the central bank’s monetary policy path.

According to ABN Amro, “for now, the path for the ECB is clear, and a rate hike at next Thursday’s Governing Council meeting is fully priced by financial markets.” However, they stress that “less clear now is what comes after,” setting out a baseline in which “the ECB” is expected to keep “rates on hold for the remainder of the year, and even cut rates in Q2-Q3 next year.”

Strategists at OCBC have highlighted that “higher energy prices have complicated the outlook for the ECB’s tightening cycle,” noting that inflation risks are “becoming less comfortable against a backdrop of only moderate growth.”