EUR/JPY stays muted around 184.00 as expectations for a BoJ rate increase grow

EUR/JPY Pauses After Four-Day Rally

The EUR/JPY currency pair has ended its four-day upward trend, hovering near 184.20 during Thursday’s European trading session. The Japanese Yen has strengthened, buoyed by increasing speculation that the Bank of Japan (BoJ) may raise interest rates soon. This sentiment is fueled by inflationary pressures linked to rising oil prices amid ongoing tensions in the Middle East, as central banks worldwide signal their willingness to tighten monetary policy in response to persistent inflation.

Although the BoJ maintained its policy rate in March, Governor Kazuo Ueda suggested that a rate adjustment could be considered in April. Japanese government bond yields have climbed, with the 10-year yield reaching 2.27% on Thursday after reversing a two-day decline. Short-term yields also surged, with 2-year bonds hitting their highest levels in thirty years and 5-year yields setting new records. This upward movement in yields reflects tighter financial conditions and mounting expectations for higher interest rates in Japan.

According to the minutes from the BoJ’s January meeting, policymakers agreed that additional rate hikes would be warranted if economic and inflation targets are achieved, given that real interest rates remain significantly negative. Most members advocated for a flexible approach, preferring to evaluate policy at each meeting rather than adhering to a predetermined schedule for tightening.

Potential Recovery for EUR/JPY

There is a possibility that EUR/JPY could rebound, as the Euro may gain support from optimism surrounding efforts to ease tensions in the Middle East. The White House has indicated that negotiations are ongoing, with reports that the Trump administration has sent a 15-point proposal to Iran through Pakistan.

Senior Iranian officials are currently reviewing the proposal but have shown reluctance to engage directly with the United States. Tehran is expected to reject the American ceasefire plan, instead presenting its own five-point initiative, which includes asserting sovereignty over the Strait of Hormuz.

ECB Response to Geopolitical Risks

European Central Bank (ECB) President Christine Lagarde stated that the ECB is closely monitoring the economic fallout from the conflict and stands ready to adjust its policy at any meeting should energy-related inflation risks intensify.