As of Thursday, EUR/JPY was hovering around 185.80, showing little change for the day after reaching a one-month peak earlier this week. The euro (EUR) continues to get support from expectations of further monetary tightening from the European Central Bank (ECB), though it has weakened a bit as the Japanese yen (JPY) has found some strength.
Investor sentiment remains tentative with escalating tensions involving Iran pushing oil prices upward, which raises fears of another inflation spike. Increased risk aversion is lending support to the yen, but the adverse effects of high energy costs on the Japanese economy have capped its gains for the time being.
In the euro area, various ECB officials have recently emphasized their willingness to tighten monetary policy further if inflation pressures seem to grow. Malin Kocher, Austria’s central bank head and an ECB Governing Council member, stated that the central bank was “prepared to act” in case of a secondary inflation impact. Similarly, Joachim Nagel, the Bundesbank president and also on the ECB’s Governing Council, indicated that it might still be necessary to “act decisively.”
These remarks came as a Reuters survey indicated that a majority of economists anticipate the ECB will maintain its deposit rate at 2.25% during its July meeting. Around 70% think there will be one more rate hike by the end of the year, likely in September. Rabobank aligns with this view, suggesting that although the situation in the Middle East presents additional inflation risks, a rate increase in July seems improbable. ING also considers a September hike likely, but acknowledges that a July hike could still be a possibility.
In Japan, uncertainty regarding the government’s strategy to bring back a portion of the Government Pension Investment Fund’s (GPIF) foreign investments continues to weigh on the yen. There are doubts about the speed of implementation, which is limiting the potential benefits for the currency. Nonetheless, Japan’s Finance Minister Satsuki Katayama reiterated on Thursday that authorities are poised to intervene in the foreign exchange market if the situation demands, but she refrained from commenting on specific exchange rate levels.
