EUR/JPY snaps three-day losing streak as solid JGB auction weakens the Yen

• EUR/JPY edges higher as the Yen weakens on easing JGB yields after a solid 10-year auction demand.
• Japan’s 10-year yield hit 1.88% on Monday, the highest since 2006, after Ueda’s hawkish remarks.
• Stable Eurozone inflation data supported views that the ECB would hold policy steady.

The Euro (EUR) edges higher against the Japanese Yen (JPY) on Tuesday as the Yen weakens in response to easing Japanese Government Bond (JGB) yields after the latest 10-year auction sees solid demand. At the time of writing, EUR/JPY is trading around 186.29, snapping a three-day losing streak.

The 10-year JGB yield climbed above 1.88% on Monday, its highest level since July 2006, after Bank of Japan (BoJ) Governor Kazuo Ueda delivered hawkish remarks that reinforced expectations that a December rate hike remains on the table. The Yen also briefly found support as markets priced in a higher probability that policymakers could move sooner rather than later.

Rising JGB yields are pushing up Japan’s debt-servicing costs, potentially limiting the BoJ’s tightening capacity and posing a headwind for the Yen. However, Tuesday’s JGB auction helps ease some of that upward pressure on yields, with solid demand reflected in a bid-to-cover ratio of 3.59, above both November’s 2.97 and the 12-month average of 3.20.

The BoJ is set to announce its monetary policy decision at the December 18-19 meeting, with markets pricing in roughly an 80% probability of a rate increase to 0.50%.

Market sentiment improved after Japanese Finance Minister Shunichi Katayama said earlier on Tuesday that he expects the Bank of Japan to conduct appropriate monetary policy to sustainably and stably achieve its price target while working closely with the government. Katayama also noted that there is no gap between the government and the BoJ in their view that Japan’s economy is recovering modestly.

Adding to Euro support, the latest Eurozone data released on Tuesday showed a mixed but broadly stable inflation backdrop and reinforced expectations that the European Central Bank (ECB) would maintain its current policy stance.

The preliminary Harmonized Index of Consumer Prices rose 2.2% YoY in November, above the 2.1% forecast and matching the 2.1% figure recorded in October. Core HICP increased 2.4% YoY in November, slightly below the 2.5% forecast and unchanged from the 2.4% reading seen in October.

The Eurozone Unemployment Rate stood at 6.4% in October, above the 6.3% forecast and the same as the 6.4% recorded in September.