• EUR/JPY posts modest gains as markets remain cautious ahead of central bank meetings.
• Monetary policy is widely expected to remain unchanged in both the Eurozone and Japan.
• Middle East tensions and elevated Oil prices continue to fuel global uncertainty.

EUR/JPY trades around 186.95 on Monday at the time of writing, up modestly by 0.07%, as markets adopt a wait-and-see stance ahead of this week’s monetary policy decisions from the Bank of Japan (BoJ) and the European Central Bank (ECB).

Investors broadly expect the Bank of Japan (BoJ) to leave interest rates unchanged at 0.75% on Tuesday. However, attention will focus on the central bank’s communication and any signals pointing to a potential rate hike in June. According to Commerzbank, the absence of clear forward guidance in this direction could weigh on the Japanese Yen (JPY), despite ongoing geopolitical tensions and concerns about intervention from Japanese authorities.

In the Eurozone, the European Central Bank (ECB) is also expected to keep rates on hold on Thursday, maintaining its benchmark deposit rate at 2%. Policymakers are adopting a wait-and-see approach amid elevated economic uncertainty, particularly linked to the conflict in the Middle East. Governing Council member Martins Kazaks recently noted that the ECB still has the “luxury” of gathering data before adjusting its policy stance.

Recent data from Germany highlight this fragile backdrop. The GfK Consumer Confidence index dropped to -33.3 for May, its lowest level in more than three years, pointing to deteriorating household sentiment. However, the impact on the Euro (EUR) has remained limited.

Geopolitical developments in the Middle East remain the key market driver. Hopes for de-escalation briefly emerged following reports that Iran had submitted a new peace proposal to the United States (US), including reopening the Strait of Hormuz. However, negotiations remain stalled, with Oil tankers blocked for two months and Crude prices hovering near $100 per barrel, raising concerns about a potential global recession.

In this environment, safe-haven flows and energy-driven inflation expectations continue to influence the Japanese Yen, while the Euro remains constrained by weak growth and limited policy visibility. The near-term direction of EUR/JPY will largely depend on signals from central banks this week and any progress on the geopolitical front.