The EUR/JPY currency pair gained momentum, rising to nearly 156.95 during early European trading hours on Wednesday, supported by growing optimism surrounding increased fiscal spending in Germany. The Euro (EUR) received a boost from reports that Germany’s incoming Chancellor, Friedrich Merz, is in talks with the Social Democrats to swiftly approve up to €200 billion ($210 billion) in special defense spending.
Investor attention is also focused on remarks from European Central Bank (ECB) officials as the central bank’s policy meeting approaches next week. ECB policymaker Joachim Nagel suggested on Tuesday that the central bank has room to further reduce interest rates if inflation moves closer to its 2% target, which is expected later this year. Meanwhile, ECB board member Isabel Schnabel indicated that the ECB may soon need to pause or halt its ongoing rate reductions.
The ECB is widely anticipated to cut rates for a fifth consecutive time next week, following a sharp decline in inflation from double-digit levels to just over 2% in recent months. This potential dovish move could weigh on the Euro (EUR) against the Japanese Yen (JPY).
Meanwhile, the Bank of Japan (BoJ) is expected to raise interest rates from 0.50% to 0.75% later this year, a prospect that could underpin the Japanese Yen. “The market has interpreted this as the government tacitly accepting the rise in domestic interest rates, fueling speculation the BoJ might raise rates sooner than expected,” noted Yuzo Sakai, chief manager of business planning at Ueda Totan Forex Ltd.
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