EUR/JPY falls as BoJ rate hike bets strengthen Japanese Yen

• EUR/JPY retreats toward 180.50, pressured by renewed JPY strength amid tightening expectations in Japan.
• BoJ Governor Ueda’s remarks reinforce bets on an upcoming rate increase, narrowing yield differentials.
• Support for the Euro remains limited despite the European Central Bank’s message of monetary stability.

EUR/JPY trades lower around 180.50 on Monday at the time of writing, down 0.35% on the day. The move reflects a clear strengthening of the Japanese Yen (JPY) following fresh comments from Bank of Japan (BoJ) Governor Kazuo Ueda, which revived expectations of an imminent policy rate hike.

Ueda stressed that the Bank of Japan would remain ready to raise rates if the economy and inflation continue to evolve as expected, noting that the probability of the baseline scenario for growth and prices “is gradually increasing”. These remarks pushed Japanese government Bond yields to multi-year highs and strengthened expectations of a rate hike.

This prospect of monetary normalization further narrows the yield gap between Japan and other major economies, mechanically supporting the Japanese Yen and weighing on EUR/JPY. A cautious tone across equity markets is also boosting safe-haven demand, which favors the JPY.

On the European side, the Euro (EUR) remains supported by the broadly accepted view that the European Central Bank (ECB) has completed its rate-cutting cycle. ECB President Christine Lagarde recently stated that borrowing costs are currently at the “right level”, while other Governing Council members, such as Joachim Nagel, expressed comfort with the current policy stance. However, this support remains modest compared with the stronger momentum behind the Japanese Yen.

Investors will now focus on Tuesday’s release of Eurozone inflation through the Harmonized Index of Consumer Prices (HICP). Markets expect headline HICP to increase by 2.2% YoY in November, with core HICP seen rising 2.5%. A hotter-than-expected reading could offer some relief to the Euro by reinforcing the likelihood of a prolonged policy pause in the Eurozone.

In the near term, however, momentum remains in favor of the Japanese Yen, supported by repeated signals from the Bank of Japan pointing toward a tightening phase that is getting closer. EUR/JPY therefore retains a bearish bias as long as investors continue to favor the JPY in this context of expected normalization in Japan and a generally cautious market environment.