EUR/JPY holds steady above 178.00, remains close to record high touched on Thursday

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EUR/JPY bulls retain control as the BoJ rate hike uncertainty keeps the JPY bulls on the defensive.
Japan's PM Takaichi is expected to pursue aggressive fiscal spending and resist policy tightening.
The ECB’s on-hold rate decision on Thursday underpins the Euro and further supports spot prices.

The EUR/JPY cross attracts some dip-buyers near the 177.85 area during the Asian session on Friday, and for now, it seems to have stalled its modest pullback from the all-time peak, touched the previous day. Spot prices currently trade around 178.15 region, nearly unchanged for the day, and remain on track to register strong monthly gains.

The Japanese Yen (JPY) did get a minor lift earlier today following the release of stronger consumer inflation figures from Tokyo, Japan's capital city, which backed the case for the Bank of Japan (BoJ) to stick to its policy tightening path. The initial reaction, however, fades quickly as investors remain uncertain over the likely timing of the next BoJ rate hike amid speculations that Japan's new Prime Minister Sanae Takaichi will pursue aggressive fiscal spending plans and resist policy tightening. This, in turn, keeps a lid on any meaningful upside for the JPY and offers some support to the EUR/JPY cross.

Meanwhile, the European Central Bank (ECB) kept interest rates unchanged at 2% for the third meeting in a row on Thursday. Moreover, the ECB repeated that policy was in a good place as the Eurozone economy continues to show resilience despite global trade uncertainty, and inflation remains close to the 2% medium-term target. This further contributes to limiting the downside for the EUR/JPY cross and backs the case for an extension of the recent well-established uptrend. Hence, any meaningful corrective pullback might still be seen as a buying opportunity and is more likely to remain limited.

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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