EUR/JPY holds losses near 187.00 ahead of ECB policy decision

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EUR/JPY edges lower after four days of gains, trading around 187.20 during the Asian hours on Thursday. The currency cross depreciates as the risk-sensitive Euro (EUR) struggles amid increased risk aversion, which could be attributed to the geopolitical tensions in the Middle East.

EUR/JPY weakens as the Euro struggles amid rising risk aversion driven by Middle East tensions.
The European Central Bank is broadly expected to keep interest rates steady on Thursday.
The currency cross may rebound as the Yen weakens amid growing short positions.

US President Donald Trump said the naval blockade on Iran will continue until a nuclear deal is secured, dismissing calls to reopen key routes and favoring economic pressure over military action. Iran warned of retaliation, accusing Washington of using coercion and destabilization tactics to force compliance.

The European Central Bank (ECB) is widely expected to leave interest rates unchanged on Thursday, in line with many global peers this week, while signaling that a rate hike, possibly as early as June, may be necessary to counter an energy-driven surge in consumer prices.

Any delay in tightening is likely to be brief, with investors anticipating a move in June followed by two additional hikes later this year, as fading prospects for peace in Iran keep oil prices elevated and nearing levels outlined in the ECB’s “adverse” scenario, according to Reuters.

Meanwhile, downside pressure on EUR/JPY may be limited as the Japanese Yen (JPY) remains under strain, with traders increasingly building short positions on expectations that neither further rate hikes nor official intervention will offer meaningful near-term support.

Bank of Japan (BoJ) Governor Kazuo Ueda reaffirmed the central bank’s gradual tightening stance, though the yen continued to weaken. Verbal interventions from policymakers have also had limited impact, with Finance Minister Satsuki Katayama stating that authorities remain ready to step into foreign exchange markets at any time to stabilize the currency.

ECB FAQs

What is the ECB and how does it influence the Euro?

The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy for the region. The ECB primary mandate is to maintain price stability, which means keeping inflation at around 2%. Its primary tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.

What is Quantitative Easing (QE) and how does it affect the Euro?

In extreme situations, the European Central Bank can enact a policy tool called Quantitative Easing. QE is the process by which the ECB prints Euros and uses them to buy assets – usually government or corporate bonds – from banks and other financial institutions. QE usually results in a weaker Euro. QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The ECB used it during the Great Financial Crisis in 2009-11, in 2015 when inflation remained stubbornly low, as well as during the covid pandemic.

What is Quantitative tightening (QT) and how does it affect the Euro?

Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the European Central Bank (ECB) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the ECB stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Euro.

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