EUR/JPY hits highest levels since early November at 132.00 as post-hawkish ECB euro momentum continues for second day

EUR/JPY rallied above its early January highs in the 131.60s to hit the 132.00 level for the first time since early November on Friday, as post-hawkish ECB euro momentum continued for a second day. The pair, up a further 0.4% on Friday, has now surged about 2.0% since Wednesday’s close underneath 129.50. Even more impressive is the pair’s on-the-week gains, which currently stand at just under 2.8%, putting the pair on course for its best weekly gain since June 2020. EUR/JPY rallied at the start of the week in tandem with equities (which at the time were performing strongly), and also as the pair found support at a long-term uptrend that has supported the price action going all the way back to November 2020.

Some described the ECB’s hawkish shift on Thursday, where Christine Lagarde admitted the bank had become more concerned about the inflation outlook and refused to repeat her previous statement that a 2022 rate hike is unlikely, as a “pivotal” moment. That certainly seems to have been the case for EUR/JPY, with many traders now predicting the pair will test its H2 2021 highs around 133.50 in the coming weeks. Underscoring the widening ECB/BoJ policy differential that many expect will be a source of support for the pair in the coming quarters was typically dovish commentary from BoJ governor Haruhiko Kuroda during Friday’s Asia Pacific session.

Kuroda reiterated that the BoJ must maintain ultra-loose monetary policy as, compared to the likes of the US and Europe, inflation in Japan remains subdued due to delayed post-pandemic recovery and the public’s sticky deflationary mindset. “In Japan, nominal wages haven't risen much” Kuroda told the Japanese parliament in a testimony. “It's hard to see inflation sustainably reach our 2% target unless wages rise in tandem with prices”. Next week will likely be fairly quiet for EUR/JPY, with focus more on the Fed and broader risk appetite, amid a smattering of tier two Eurozone and Japanese data releases.