EUR/JPY trades around 156.95 as the Euro receives support from potential increased defence spending in Germany, estimated at €200 billion. The Japanese Yen is also supported by expectations of a rise in interest rates from the Bank of Japan.
The European Central Bank (ECB) is anticipated to cut rates for the fifth consecutive time, following a drop in inflation to just over 2%. ECB officials suggest interest rate reductions may pause if inflation stabilises.
In contrast, the BoJ is projected to raise its rate from 0.50% to 0.75%, which is likely to support the Yen further.
The Euro is holding its ground near 156.95 against the Yen, helped along by talks of more defence spending in Germany. A budget increase of €200 billion is not a small figure, and markets are treating it as a factor that could push up demand. With Japan’s currency also finding backing from speculation of rising interest rates, the next few weeks will bring a tug-of-war between these two forces.
At the centre of attention is what comes next for monetary policy. The ECB has been predictable in cutting rates, now expected for a fifth straight time. Falling inflation, now hovering slightly above 2%, has been the permission slip for these reductions. But policymakers are hinting that this downward cycle is not necessarily locked in. If data steadies, they might hit the brakes on further cuts. That would change the dynamics of the Euro’s movement, particularly against currencies that have a different trajectory.
Meanwhile, expectations are growing that Kazuo Ueda and his colleagues at the BoJ will push their key rate from 0.50% to 0.75%. If that happens, Yen bulls will have more reason to increase their positions. The Japanese currency has been undervalued for some time, and higher borrowing costs make it less attractive to sell.
For those watching derivatives, this sets up a situation where sudden volatility could emerge. The market has largely priced in both the ECB cut and the BoJ hike, but any deviation from this script could prompt quick moves. For example, if the ECB pauses earlier than assumed, the Euro might get a boost. On the other hand, if the BoJ proceeds more cautiously than markets expect, the Yen could weaken unexpectedly.
Recent market positioning suggests a balance of opinions. Some traders remain convinced that the Euro will hold steady due to Eurozone economic resilience, while others are betting that Japan’s rate adjustments will start to matter more. Options pricing suggests hedging is picking up—likely in response to the risk of policy shifts happening differently than expected.
With this in mind, the prudent approach in the near term is to stay alert for fresh comments from rate-setters. Speeches, interviews, and even off-the-cuff remarks can shift sentiment quickly. Inflation prints also hold weight, particularly if they show Eurozone prices stabilising faster than projected or if Japanese data hints at a more measured approach from the BoJ.
The coming weeks will be a test of expectations versus reality. If both central banks deliver exactly what markets anticipate, price action might be muted. But should one of them steer in an unexpected direction, swings could follow as traders adjust their positions.
