EURJPY Gains Support as ECB Lowers Deposit Rate by 25 bps to 2.5%

Key moments

Currency Pair Reacts to Diverging Monetary Policies and Bond Yield Movements

The EUR/JPY currency pair experienced a period of volatility during Thursday’s trading session, finding temporary support near the 159.20 level after an intraday decline of over 0.75%. This movement followed the European Central Bank’s (ECB) decision to lower its Deposit Facility rate by 25 basis points (bps) to 2.5%. This rate cut, the fifth consecutive reduction by the ECB, was largely anticipated by market participants, reflecting the central bank’s ongoing efforts to manage inflation within the Eurozone. The ECB’s decision is based on the expectation that inflation will return sustainably to the 2% target this year, with some officials also acknowledging the risk of undershooting this target due to subdued domestic and international demand.

Conversely, the Japanese Yen (JPY) has demonstrated notable strength, driven by rising yields on Japanese Government bonds (JGBs). The 10-year JGB yield reached a 15-year high, approaching 1.55%, as traders increasingly anticipate further interest rate hikes by the Bank of Japan (BoJ). This growing confidence stems from recent statements by BoJ Deputy Governor Shinichi Uchida, who indicated that the central bank would continue to adjust its monetary policy if economic and inflation trends align with expectations. The diverging monetary policies between the ECB and the BoJ, coupled with the contrasting bond yield movements, have contributed to the fluctuations in the EUR/JPY pair.

In the lead-up to the ECB’s rate decision, the Euro (EUR) had shown relative strength against other major currencies, buoyed by news of a potential 500 billion Euro infrastructure fund in Germany. This proposed fund, supported by key political figures, fueled expectations of increased inflationary pressures and economic stimulus within the Eurozone. However, the subsequent ECB rate cut and the strengthening JPY have exerted downward pressure on the EUR/JPY pair, highlighting the complex interplay of monetary policy and bond market dynamics in the foreign exchange market.