The EUR/JPY pair has reclaimed some ground, trading around 163.00 during the Asian session on Friday, recovering from recent losses. The rebound is largely attributed to the continued weakness of the Japanese Yen (JPY), with ongoing uncertainty over the timing of interest rate hikes by the Bank of Japan (BoJ).
Japan Faces Deflationary Struggles Amid Economic Challenges
On Friday, Japan’s Economy Minister, Ryosei Akazawa, highlighted the critical stage the country is in as it aims to overcome its persistent deflationary mindset. Akazawa stated, “Once we can officially declare the end of deflation, we will be able to stop using the tools we’ve had in place to combat it.” This statement underscores the challenges Japan faces as it navigates its economic recovery.
Japan’s economic data revealed a mixed picture. In November, real household spending contracted by 0.4% year-over-year, better than the expected 0.6% decline, and showing improvement over the 1.3% drop in the previous month. However, Japan’s foreign reserves saw a decline of $8.28 billion in December, dropping to $1.12 trillion, marking the lowest level since July. These factors continue to contribute to the pressure on the yen.
Eurozone Inflation Data and ECB Rate Cut Expectations
In the Eurozone, inflation rose to 2.4% in December, up from 2.2% in November, while retail sales showed a modest month-over-month increase of 0.1% in November, following a 0.3% drop in October. Despite these signs of stabilization, analysts remain largely unaffected in their outlook for the European Central Bank (ECB). The ECB is still expected to proceed with a 25 basis point (bps) rate cut in January, as markets are pricing in a 96% probability of such an action this month.
The expectations for further ECB easing in 2025 have been adjusted, with markets now anticipating three quarter-point rate cuts, with a 70% chance of a fourth cut as part of the central bank‘s strategy to address ongoing economic conditions.
Outlook for EUR/JPY
The weaker Japanese Yen continues to support the EUR/JPY cross, with markets watching for any changes in BoJ policy direction and further developments in the Eurozone’s economic indicators. Investors will be keenly focused on any shifts in the BoJ’s stance on interest rate hikes, while the ECB’s anticipated rate cut will likely continue to influence market sentiment surrounding the euro.
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