- EUR/JPY exhibits strength ahead of the ECB’s policy decision.
- The ECB is expected to announce a dovish decision but will not commit subsequent rate cuts.
- BoJ Ueda emphasizes reducing bond purchases in a manner to exit from an expansionary policy stance.
The EUR/JPY pair clings to gains near the psychological resistance of 170.00 in Thursday’s European session. The cross holds onto strength ahead of the European Central Bank’s (ECB) monetary policy announcement at 12:15 GMT.
The ECB is expected to cut its Deposit Facility Rate by 25 basis points (bps) to 3.75%. A rate-cut move by the ECB in June’s meeting appears to be a done deal, as several ECB officials have already communicated. However, the attention of investors will be on the interest-rate outlook. The ECB is expected to state that they intend to remain data-dependent and prefer not to commit to any specific interest-rate path as the battle against inflation has not been won yet.
The reasoning behind abstaining from committing subsequent rate cuts is the higher-than-expected increase in the annual Eurozone’s Harmonized Index of Consumer Prices (HICP) data for May and the return of the old continent to growth after a shallow recession in the second half of 2023.
A slew of ECB policymakers have also warned that premature rate cuts could revamp price pressures again and will offset efforts yet made to bring inflation down to its current levels.
On the economic front, German Factory Orders for April unexpectedly contracted by 0.2%. The economic data declined for the fourth straight time. Investors anticipated them to have grown by 0.3%. Annually, Industrial Orders contracted by 1.6%.
Meanwhile, the Japanese Yen weakened after Bank of Japan (BoJ) Governor Kazuo Ueda commented that inflation expectations are gradually rising but have yet to reach 2%, Reuters reported. Ueda emphasized on reducing bond purchases in a manner to move forward towards their agenda of exiting expansionary policy stance.
Over the policy outlook, BoJ board member Toyoaki Nakamura advised that the current policy framework is appropriate for now as households' purchasing power is weak. Therefore, a solid increase in disposable income is necessary to encourage spending.
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