EUR/JPY Holds Above 185 as ECB Outlook Guides Trade

Key Moments

EUR/JPY Supported by ECB Policy Expectations

EUR/JPY is trading near 185.20 in early European dealings on Wednesday, extending its positive tone as the Euro (EUR) edges higher against the Japanese Yen (JPY). The move comes as markets anticipate that the European Central Bank (ECB) will increase interest rates at its policy meeting on Thursday in June.

The ECB is expected to lift its key interest rate for the first time in nearly three years on Thursday, positioning itself as the first among its peers to tighten policy in reaction to a surge in energy prices linked to the conflict in the Middle East. Money markets are already discounting a second 25 basis point (bps) increase in September, while economists anticipate the ECB will adopt a “gently hawkish” but strongly data-dependent stance, avoiding any firm commitment to a predetermined policy path.

“Lagarde may provide some indication of the ECB’s next move after she muddled communication on the rate outlook in March. We expect her to be clearer than in the past that a second hike may be in the pipeline,” said Simona Delle Chiaie, chief euro-area economist at Bloomberg. Any hawkish comments from ECB policymakers could lift the EUR against the JPY in the near term.

Technical Picture: Bullish Structure with Scope for Consolidation

On the daily chart, EUR/JPY maintains a constructive short-term outlook as it trades just above the middle line of the Bollinger Bands and remains firmly above the 100-day simple moving average (SMA). This configuration points to solid demand on pullbacks, even as momentum indicators show a more balanced backdrop.

The 14-day Relative Strength Index (RSI) stands at 49.99, signaling neutral momentum and suggesting that the market may be pausing rather than reversing after its recent upward grind.

On the upside, the first resistance level comes in near the upper Bollinger Band at 186.05, where new selling pressure could surface. Beyond that, additional upside markers are located at the February 9 high of 186.24, followed by the January 23 peak at 186.88.

On the downside, immediate support lies around the middle Bollinger Band near 185.15. Below that, the 100-day SMA at 184.50 offers another layer of support. A deeper retreat toward the lower Bollinger Band around 184.25 is expected to draw buyers as long as the broader bullish configuration remains intact.

Background on the Euro and ECB Policy

The Euro serves as the currency for 20 European Union member states that make up the Eurozone. It is the second most actively traded currency globally, behind the US Dollar. In 2022, it represented 31% of all foreign exchange transactions, with an average daily turnover exceeding $2.2 trillion. The EUR/USD pair is the most heavily traded currency pair worldwide, accounting for an estimated 30% of all transactions, followed by EUR/JPY (4%), EUR/GBP (3%), and EUR/AUD (2%).

The European Central Bank (ECB), headquartered in Frankfurt, Germany, functions as the reserve bank for the Eurozone, setting interest rates and managing monetary policy. Its primary mandate is to maintain price stability, either by containing inflation or supporting growth. The main tool it uses is interest rate adjustment. Comparatively higher interest rates – or the expectation of higher rates – tend to support the Euro, while lower rates generally weigh on it.

The ECB Governing Council, which includes the heads of national central banks in the Eurozone and six permanent members such as ECB President Christine Lagarde, meets eight times a year to decide on monetary policy.

Key Macro Drivers for the Euro

Eurozone inflation, tracked by the Harmonized Index of Consumer Prices (HICP), is a key variable for the Euro. If inflation accelerates more than anticipated, particularly above the ECB’s 2% target, the central bank may be compelled to raise interest rates to restore price stability. Higher interest rates relative to other major economies typically favor the Euro by making Eurozone assets more attractive to global investors.

A wide range of macroeconomic indicators influence the Euro, including GDP, Manufacturing and Services PMIs, labor market data, and consumer confidence measures. Robust data tends to underpin the currency by attracting foreign capital and potentially prompting tighter monetary policy, whereas weak figures can pressure the Euro lower. Data from Germany, France, Italy, and Spain carry particular weight as these four economies account for 75% of the Eurozone’s output.

Trade balance data is another important release for the Euro. It captures the difference between export revenues and import spending over a specific period. A positive trade balance can bolster a currency as foreign buyers need to purchase that currency to pay for exports, while a negative balance can have the opposite effect.