Euro holds losses as BoJ pause weighs on EUR/JPY

• Bank of Japan interest rate hold at 1.25% strengthens Yen, pressing EUR/JPY lower.
• BoJ inflation target revisions highlight potential for further Japanese monetary policy tightening.
• Surging energy costs fuel European inflation risks, keeping a December ECB rate hike firmly in play.

EUR/JPY halts its two-day winning streak, trading around 176.10 during Asian hours on Friday. The currency cross loses ground as the Japanese Yen (JPY) holds gains following the Bank of Japan's (BoJ) decision to leave its short-term interest rate unchanged at 1.25%. The hold, which aligned with market expectations, concluded the central bank's two-day monetary policy review meeting.

The summary of the BoJ’s Monetary Policy Statement revealed that the median projection for core CPI in fiscal 2026 remains at 2.5%, unchanged from July, with underlying inflation hitting levels consistent with the price target.

Looking ahead, the core-core CPI median projection for fiscal 2027 was revised upward to 2.7% from 2.6% in July, with the board warning that underlying inflation could potentially exceed targets. The BoJ reaffirmed its commitment to adjusting monetary policy as needed, emphasizing the necessity of preventing unchecked inflation from hurting the broader economy later.

Despite current JPY strength, the EUR/JPY cross may soon regain ground as the Euro draws support from a hawkish European Central Bank (ECB) policy outlook. Surging energy costs have heightened inflation risks across the Eurozone, signaling to traders that an ECB rate hike in December remains firmly in play.

Euro rate path in focus as markets eye December ECB move

Strategists at Scotiabank highlight that market pricing still leans toward additional tightening, noting that "markets expect a further 25bps hike in December," even as "many forecasters (including Scotia) think policymakers will halt." This divergence underscores lingering uncertainty around the ECB’s near-term policy trajectory despite growing expectations that the current cycle is approaching its end.