EUR/JPY edged up towards 185.30 on Monday, up 0.16% at the time of writing, as markets positioned for the Eurozone’s preliminary HCOB Purchasing Managers Index (PMI) readings due Tuesday and tracked remarks from European Central Bank (ECB) President Christine Lagarde. Attention is on the first estimates of the June PMIs for signals on growth momentum and the near-term policy path.
On rates, ECB policymaker Pierre Wunsch said a further hike could come as soon as next month if inflation pressures broaden beyond energy. The ECB deposit rate is 2.25%, and markets are pricing at least one more 25-basis-point increase in coming months. In Japan, the yen remained weak despite renewed warnings of possible action against disorderly moves from Finance Minister Satsuki Katayama. Risk sentiment also reflected Middle East tensions and disruption fears tied to the Strait of Hormuz, after Iran announced its closure, while US President Donald Trump threatened further military action against Iran if Hezbollah attacks persist.
Those factors have outweighed expectations of further Bank of Japan (BoJ) tightening. BoJ April minutes showed some members favoured faster increases to prevent inflation overshooting, and Deputy Governor Shinichi Himino said policy would be adjusted in line with conditions. Focus now turns to Japan’s Tuesday PMIs and Wednesday’s BoJ Summary of Opinions following a 25-basis-point rise that took the policy rate to 1%.
Eurozone Outlook and ECB Policy Debate
We are seeing the EUR/JPY cross push toward 188.50, as the market looks ahead to critical data releases from the Eurozone. Upcoming preliminary PMI data will be the main focus, alongside any speeches from the European Central Bank President. These events will offer fresh clues on the direction of European growth and monetary policy.
The European Central Bank’s next move is being heavily debated, especially with the latest inflation figures showing the Harmonised Index of Consumer Prices at 2.6%, still stubbornly above the 2% target. Financial markets are now pricing in a potential quarter-point hike from the current 2.75% deposit rate by the end of the summer. This hawkish sentiment continues to provide a tailwind for the Euro.
Japanese Yen Under Pressure Amid Geopolitical Tensions
Meanwhile, the Japanese Yen remains under significant pressure, leading to renewed verbal warnings from finance ministry officials in Tokyo. We’ve seen this before, as this situation is reminiscent of the 2022-2024 period when officials frequently tried to talk up the currency with little lasting effect. The market appears skeptical that direct intervention is imminent without a more disorderly decline.
Adding to the Yen’s weakness are ongoing geopolitical tensions in the South China Sea, which are threatening to disrupt key shipping lanes. As a net energy importer, Japan’s economy is particularly vulnerable to any potential spike in oil and gas prices from supply chain disruptions. These external risks are currently outweighing domestic policy factors for the currency.
This is happening even as the Bank of Japan considers its own path for policy normalization, having already raised its policy rate to 0.50% earlier this year. However, with Japan’s latest national CPI data at a soft 1.8%, traders are questioning how aggressively the BoJ can tighten policy. We will be watching the release of the BoJ’s Summary of Opinions from its last meeting for any signs of a more hawkish consensus.
