Euro climbs vs Yen as ECB tightening expectations clash with BoJ hike, intervention risks

• EUR/JPY rises toward 185.85, supported as the ECB is expected to raise interest rates this month.
• Eurozone Retail Sales decline in April, but markets continue to anticipate ECB monetary tightening.
• Prospects of a BoJ rate hike and FX intervention risks continue to limit the cross's upside potential.

EUR/JPY trades around 185.85 on Thursday at the time of writing, up 0.12% on the day. The cross is supported by the Euro (EUR) as investors expect the European Central Bank (ECB) to deliver another interest rate hike at its June meeting.

The latest Eurozone economic data presents a mixed picture. Services and Composite Purchasing Managers Index (PMI) figures for May were revised higher on Wednesday, although they remain in contraction territory. At the same time, April’s Producer Price Index (PPI) confirmed persistent inflationary pressures, reinforcing expectations that the ECB could continue its monetary tightening cycle after June’s hike.

Data released on Thursday, however, pointed to weaker consumer demand. Eurozone Retail Sales fell by 0.4% MoM in April, following a revised 0.8% increase in the previous month and compared with market expectations for a 0.3% decline. On an annual basis, Retail Sales growth slowed to 1% from 2.1% previously. Despite these mixed figures, investors continue to price in a 25-basis-point rate hike at the next ECB meeting.

A Reuters poll of economists showed that the European Central Bank is expected to raise its deposit rate to 2.25% in June, with another increase likely in September. However, analysts at BNY argue that a more hawkish ECB stance may not necessarily translate into sustained gains for the Euro.

On the Japanese side, the Japanese Yen (JPY) remains supported by growing expectations that the Bank of Japan (BoJ) will continue normalizing monetary policy. BoJ Governor Kazuo Ueda said on Wednesday that the central bank’s basic stance remains to continue raising interest rates in line with economic, inflation, and financial developments. Meanwhile, Japan’s Finance Minister Satsuki Katayama reiterated that authorities stand ready to intervene in the foreign exchange market if necessary.

These factors continue to cap EUR/JPY gains despite improving sentiment toward the Euro. Investors remain cautious about the possibility of intervention by Japanese authorities should the Japanese Yen weakness intensify further.