EUR/JPY steadies near 167.00 as markets weigh geopolitics and interest rates

EUR/JPY remains supported as the ECB leans dovish and the BoJ maintains an ultra-loose policy stance.
EUR/JPY trades firm ahead of Japan’s inflation data.
The Euro looks to Friday’s German PPI for directional cues, as weak prints could reinforce expectations of ECB easing.

Tammy Da Costa, CFTe®FXStreet

EUR/JPY is holding near the 167.00 level on Thursday, as markets digest cautious commentary from European Central Bank (ECB) policymakers and prepare for key monetary policy updates from the Bank of Japan.

While the Euro (EUR) faced mild pressure earlier in the session, a broadly weaker Japanese Yen (JPY) helped keep the cross supported, as investors remained focused on the diverging policy paths between the ECB and the Bank of Japan (BoJ).

ECB speakers hint at potential for future rate cuts

Speaking on Thursday at the European University Institute in Italy, François Villeroy de Galhau, Governor of the Banque de France and a member of the ECB’s Governing Council, said the next move in interest rates “would most likely be a cut” within the next six months, as long as there are no major geopolitical shocks.

He warned that external risks, such as a surge in Oil prices or new military developments in the Middle East, could delay policy easing, but emphasized the ECB’s readiness to gradually loosen policy should inflation dynamics permit.

His remarks reinforced the ECB’s preference for a patient and data-driven approach, adding to market expectations for a possible rate cut in Q3.

Also on Thursday, Bundesbank President Joachim Nagel backed the cautious tone, noting that Eurozone inflation had cooled to 1.9% in May, effectively reaching the ECB’s 2% target. Still, he urged a “meeting-by-meeting” approach to rate decisions, citing persistent uncertainty surrounding global economic conditions and geopolitical risks.

Japanese Yen remains cautious ahead of BoJ Minutes

On the Japanese side, BoJ Governor Kazuo Ueda reiterated that Japan needs to see a “sustainable and stable” rise in inflation before raising interest rates.

His comments, delivered earlier this week, effectively pushed back against speculation of a rate hike as soon as July. With Japan’s policy rate still near zero and inflation expectations remaining subdued, the Yen has stayed under pressure, underpinning the broader uptrend in EUR/JPY.

Looking ahead, several key risk events could influence the next move in EUR/JPY.

On Friday, the release of Eurozone flash manufacturing and services Purchasing Managers' Index (PMI) for June will provide a timely snapshot of business activity across the bloc.

A reading below the 50.0 threshold would signal contraction and could reinforce market expectations for ECB rate cuts, putting renewed pressure on the Euro.

Meanwhile, Thursday’s BoJ meeting minutes, due at 23:50 GMT, will be closely watched for any hints of a shift in policy stance.

Geopolitical tensions also remain a critical wildcard, with the ongoing Israel–Iran conflict posing the risk of safe-haven flows into the Yen. Should the situation escalate, it could limit EUR/JPY gains despite underlying Eurozone fundamentals.

Interest rates FAQs

What are interest rates?

Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%. If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.

How do interest rates impact currencies?

Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.

How do interest rates influence the price of Gold?

Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank. If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.

What is the Fed Funds rate?

The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure. Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.

Author

Tammy Da Costa, CFTe®

FXStreet

Tammy is an economist and market analyst with a deep passion for financial markets, particularly commodities and geopolitics.

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