EUR/JPY holds gains above 184.00 on risk-on sentiment, ECB rate hike prospects

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The EUR/JPY cross gains traction to around 184.15 during the early European trading hours on Friday. The Euro (EUR) edges higher against the Japanese Yen (JPY) amid improved risk sentiment and hawkish signals from the European Central Bank (ECB).

EUR/JPY strengthens near 184.15 in Friday’s early European session.
Risk-on mood and expectations of further ECB interest rate hikes support the Euro.
Japanese authorities reportedly intervened in the FX market in early May to support the Yen.

ECB Executive Board member Isabel Schnabel said on Thursday that the bank could raise the interest rates as soon as next month, adding that companies and households are now reacting in a concerning way to surging global energy prices. Additionally, ECB board member Piero Cipollone noted on Wednesday that the chance of a central bank rate hike has risen as ‌inflation pressures are high, even as negotiated wage data showed pay demands had yet to increase.

Financial markets are now pricing in a 92% chance of a 25 basis point (bps) hike at the June meeting, with a total of three hikes anticipated by the end of 2026, according to Reuters.

Nonetheless, the potential of further intervention from Japanese officials might underpin the JPY and create a headwind for the cross. Reuters reported on Friday, citing a source familiar with the matter, that Japan’s officials intervened in the foreign exchange market during holidays in early May after having conducted Japanese Yen-buying operations on April 30. The source said: “The intervention since the start of May was timed to coincide with the holiday period, when market liquidity was thin.”

Japanese Yen FAQs

What key factors drive the Japanese Yen?

The Japanese Yen (JPY) is one of the world’s most traded currencies. Its value is broadly determined by the performance of the Japanese economy, but more specifically by the Bank of Japan’s policy, the differential between Japanese and US bond yields, or risk sentiment among traders, among other factors.

How do the decisions of the Bank of Japan impact the Japanese Yen?

One of the Bank of Japan’s mandates is currency control, so its moves are key for the Yen. The BoJ has directly intervened in currency markets sometimes, generally to lower the value of the Yen, although it refrains from doing it often due to political concerns of its main trading partners. The BoJ ultra-loose monetary policy between 2013 and 2024 caused the Yen to depreciate against its main currency peers due to an increasing policy divergence between the Bank of Japan and other main central banks. More recently, the gradually unwinding of this ultra-loose policy has given some support to the Yen.

How does the differential between Japanese and US bond yields impact the Japanese Yen?

Over the last decade, the BoJ’s stance of sticking to ultra-loose monetary policy has led to a widening policy divergence with other central banks, particularly with the US Federal Reserve. This supported a widening of the differential between the 10-year US and Japanese bonds, which favored the US Dollar against the Japanese Yen. The BoJ decision in 2024 to gradually abandon the ultra-loose policy, coupled with interest-rate cuts in other major central banks, is narrowing this differential.

How does broader risk sentiment impact the Japanese Yen?

The Japanese Yen is often seen as a safe-haven investment. This means that in times of market stress, investors are more likely to put their money in the Japanese currency due to its supposed reliability and stability. Turbulent times are likely to strengthen the Yen’s value against other currencies seen as more risky to invest in.