Euro advances as ECB tightening expectations, Japan fiscal concerns weigh on Yen

• EUR/JPY advances as investors increase bets on additional European interest rate hikes.
• Stronger Eurozone inflation and economic growth reinforce expectations for tighter monetary policy.
• Concerns over Japan's fiscal outlook and persistent yield differentials continue to pressure the Japanese Yen.

EUR/JPY trades around 181.70 on Monday, up 0.44% on the day at the time of writing, supported by renewed optimism surrounding the Euro (EUR) and persistent weakness in the Japanese Yen (JPY).

The Euro gains ground as investors increasingly expect the European Central Bank (ECB) to continue tightening monetary policy. According to Deutsche Bank analysts, financial markets currently assign around a 90% chance to an interest rate hike at the ECB's September meeting. Reuters also reports that markets are now pricing in more than two additional rate increases, with hikes fully priced by October and April.

Recent macroeconomic data have reinforced these expectations. Eurozone inflation accelerated to 2.9% YoY in July from 2.8% previously, while core inflation unexpectedly rose to 2.5% YoY. At the same time, the Eurozone economy expanded by 0.4% in the second quarter, twice as fast as consensus estimates and marking its strongest pace of growth since early 2025. The combination of resilient growth and sticky inflation continues to support expectations that the ECB will maintain a restrictive policy stance.

On the other side of the cross, the Japanese Yen remains under pressure despite last week's coordinated currency market intervention by Japanese and United States (US) authorities. According to Bloomberg, Japan likely spent around $34 billion supporting the Japanese Yen last week, while Japan's Finance Minister Satsuki Katayama reiterated that authorities stand ready to intervene again if necessary. US Treasury Secretary Scott Bessent also signaled that Washington would not hesitate to cooperate in future interventions, with US President Donald Trump describing the action as "a signal of friendship."

However, market attention has quickly shifted back toward Japan's deteriorating fiscal outlook. Japan's ruling Liberal Democratic Party (LDP) has backed a proposal to temporarily reduce the food consumption tax from 8% to 1% beginning in April 2027, alongside roughly ¥600 billion in annual cash transfers for low- and middle-income households. Investors remain concerned by the absence of a clear funding plan, weighing on confidence in the Japanese currency.

The wide interest rate differential between Japan and other major economies also continues to support carry trades. Although the BoJ raised its policy rate to 1% in June, borrowing costs remain well below those of other developed economies, limiting demand for the Japanese Yen and providing an additional tailwind for EUR/JPY.

EUR/JPY technical analysis

In the one-hour chart, EUR/JPY trades at 181.71, keeping a capped tone as it holds well beneath the 100-period and 200-period simple moving averages (SMAs) at 183.74 and 185.06. The recovery from recent lows is underpinned by a constructive Relative Strength Index (RSI) at 58.16, but the pair remains constrained by a dense Fibonacci resistance stack overhead, suggesting near-term rebounds are vulnerable while price stays below these medium-term averages.

On the topside, initial resistance is located at the 38.2% Fibonacci retracement at 182.46, followed by the 50.0% retracement at 183.42 and the 100-period SMA at 183.74, with further barriers at the 61.8% retracement at 184.38 and the 200-period SMA at 185.06 before the 78.6% retracement at 185.74 and cycle high at 187.47. On the downside, immediate support is seen at the 23.6% Fibonacci retracement at 181.28, ahead of the upward trend-line near 180.88, while a deeper slide would expose the structural anchor around 179.37.

(The technical analysis of this story was written with the help of an AI tool. Know more.)