• EUR/JPY trades around 185.20 on Thursday, virtually unchanged on the day after surrendering its recent gains.
• The ECB is expected to raise interest rates by 25 basis points, but investors are primarily focused on guidance.
• Fears of intervention and expectations of a BoJ rate hike are limiting the pair’s upside potential.

EUR/JPY trades around 185.20 on Thursday at the time of writing, as market participants remain cautious ahead of the European Central Bank (ECB) monetary policy decision. While a 25-basis-point rate hike is largely priced in, attention is centered on the tone adopted by ECB President Christine Lagarde and the institution’s updated economic projections.

Investors are attempting to determine whether this rate increase marks the beginning of a new tightening cycle or merely a one-off move aimed at containing inflation risks stemming from higher energy prices caused by tensions in the Middle East. Economists expect the ECB to revise its inflation forecasts higher while lowering its growth projections for the Eurozone, reflecting the negative impact of rising energy costs on economic activity.

On the Japanese side, the Japanese Yen (JPY) remains supported by speculation surrounding another Bank of Japan (BoJ) rate hike at next week’s policy meeting. A Reuters poll shows that a 25-basis-point increase is widely expected, which would further advance the central bank’s ongoing monetary policy normalization process.

However, concerns about Japan’s economic outlook persist. Iran’s announced closure of the Strait of Hormuz and the potential disruption of energy supplies represent a major risk for Japan, which remains heavily dependent on imported energy. This situation limits the Japanese Yen’s ability to strengthen sustainably despite expectations of tighter monetary policy.

In addition, Japanese authorities continue to closely monitor foreign exchange market developments. Finance Minister Satsuki Katayama recently reiterated that the government remains prepared to take decisive action to prevent excessive weakness in the domestic currency. These warnings are gaining importance as current exchange rate levels approach areas that previously triggered intervention in the currency market.

According to BNY’s Geoff Yu, even if the BoJ continues its gradual tightening cycle, capital flow dynamics and concerns surrounding the government Bond market limit the prospects for a significant appreciation of the JPY. This combination of factors could keep EUR/JPY in a consolidation phase as traders await greater clarity on the respective policy outlooks of both the ECB and the BoJ.