The EUR/JPY pair saw a slight increase of 0.15% on Friday, trading close to 184.15 as of this writing. There’s an expectation among investors for more monetary tightening in the eurozone. Meanwhile, indications that Japan may raise interest rates soon—potentially as early as September—are supporting the pair.
In Europe, there’s a strong consensus that the European Central Bank (ECB) will hike interest rates again at its September meeting, marking a second increase this year. Inflation risks in the euro area appear to be rising, which bolsters the euro (EUR) outlook alongside these tightening policies.
Recent growth data also supports a favorable scenario for the euro. Eurostat’s updated figures confirm that the eurozone’s GDP grew by 0.4% quarter-on-quarter in the second quarter, a figure consistent with the preliminary report from July, which indicated no growth in the prior quarter.
On an annualized basis, eurozone GDP climbed to 1% in the second quarter, up from a revised 0.5% in the previous quarter. While this suggests some recovery in economic activity, the ECB must still navigate persistent inflation risks.
Nevertheless, the outlook for monetary policy in Japan limits the euro’s potential against the yen. There is an increasing belief that the Bank of Japan (BOJ) might implement a rate hike at its September meeting. Reuters has indicated, based on multiple sources, that the BOJ is contemplating an earlier increase followed by a faster tightening pace afterward.
This anticipation is boosting the Japanese yen (JPY), although there remains scrutiny surrounding possible market interventions. Recently, Japan’s Ministry of Finance disclosed that the U.S. and Japan jointly intervened in late July to address excessive volatility and erratic movements in the yen.
With expectations for tightening rising in both regions, the euro/yen pair is effectively balanced between the bullish sentiment for the euro—based on anticipated ECB hikes—and a supportive environment for the yen due to the BOJ’s potential policy normalization.
Split Outlook on Eurozone Interest Rates as ECB Hawks Clash with Doves
Nordea analysts observe that the ECB’s communications from the July Governing Council meeting hinted at further rate increases. They maintain a forecast of three 25 basis points hikes that could elevate deposit rates to 3%. However, they modified their expected hike pace from consecutive increases to quarterly adjustments. Their latest projections include rate hikes of 25 basis points in September, December, and March 2027, implying a gradual but assertive monetary stance. They caution that geopolitical shifts could alter this outlook significantly, suggesting that swift and stable peace in the Middle East might ease pressure on the ECB, while heightened conflicts could accelerate further rate hikes.
In contrast, Commerzbank expresses cautious expectations for additional tightening. While they anticipate a second hike in September, they diverge from the broader market by not forecasting a third hike. They believe a deposit rate of 2.5% would hit the upper limit of a neutral rate—not stimulating or slowing the economy, which could maintain steady inflation. Looking ahead, they expect inflation to gradually ease towards the target, leading the ECB to possibly lower rates by late 2027.
Yen Weakens as Japanese Data Aligns with BOJ Rate Hike Projections
ING analysts note that, despite some volatility in Japan’s money markets this week, the yen hasn’t found significant support. They highlight a developing narrative that the Japanese government might be more amenable to the BOJ speeding up its tightening. Current market sentiment places a near 75% chance of a 25 basis point increase in September. ING points out that this shift in expectations has tightened the two-year US-Japan swap spread by approximately 40 basis points since mid-July.
Meanwhile, DBS economists contextualize this viewpoint, predicting Japan’s GDP will show on-trend growth of 0.8%, slower than the 1.8% in the first quarter. They believe this data could reinforce the argument for an early BOJ rate hike in September. However, they also advise that future decisions will depend on market conditions, like USD/JPY rates and the outcomes of U.S. policy signals from the September FOMC meeting.
