EUR/JPY weakens below 180.50 as BoJ's Ueda hints at rate hike

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EUR/JPY edges lower to around 180.45 in Monday’s early European session.
BoJ’s Ueda signaled that his board might increase interest rates soon, supporting the Japanese Yen.
ECB’s Lagarde said the central bank is well-positioned with borrowing costs currently at the right level.

The EUR/JPY cross attracts some sellers near 180.45 during the early European session on Monday. The Japanese Yen (JPY) strengthens against the Euro (EUR) due to the latest comments from Bank of Japan (BoJ) Governor Kazuo Ueda. The HCOB Manufacturing Purchasing Managers Index (PMI) from the Eurozone, Germany, and France will be released later on Monday.

BoJ Governor Kazuo Ueda reaffirmed bets for an imminent interest rate hike, pushing Japanese government bond (JGB) yields to their highest levels in years. Ueda said on Monday that the central bank remains on track to raise interest rates further if prices and the economy continue to unfold as expected.

He further stated that the likelihood of the BoJ’s baseline scenario for growth and inflation being realized is gradually increasing. Traders are now pricing in about a 76% odds of a rate hike when the Japanese central bank makes its next decision on December 19, following Ueda’s speech, up from around 58% probability on Friday.

On the other hand, the Euro could receive support from the growing acceptance that the European Central Bank (ECB) is done cutting interest rates. ECB President Christine Lagarde said last week that borrowing costs are at the "right level." Meanwhile, ECB Governing Council member Joachim Nagel noted that he’s comfortable with the monetary-policy settings.

Traders will closely monitor the preliminary reading of the Eurozone Harmonized Index of Consumer Prices (HICP) on Tuesday. The HICP inflation is expected to show an increase of 2.2% YoY in November, while the core HICP is projected to show a rise of 2.5% YoY during the same period. Any signs of hotter-than-expected inflation data could lift the EUR against the JPY in the near term.

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.