Euro drifts lower vs Yen; remains confined in a range ahead of ECB, BoJ policy updates

The EUR/JPY cross meets with fresh supply on Thursday, stalling the previous day's modest bounce from the 175.40 area, or the weekly low. Spot prices, however, remain confined in a familiar range held over the past week or so through the first half of the European session as traders now look to the European Central Bank (ECB) policy update for a fresh impetus.

The ECB is widely expected to keep policy rates unchanged, while maintaining a hawkish bias toward a potential 25-basis-point (bps) hike in December. Apart from this, the focus will be on the accompanying policy statement and the post-meeting press conference, where comments from ECB President Christine Lagarde should influence the shared currency. The immediate market reaction, however, is likely to be muted as the ECB might refrain from providing explicit forward guidance to preserve policy flexibility amid severe political and fiscal turmoil in France.

This, along with the emergence of some US Dollar (USD) buying, undermines the shared currency, which, in turn, is seen as a key factor exerting some downward pressure on the EUR/JPY cross. Meanwhile, the Japanese Yen (JPY) continues with its relative underperformance as the wide interest rate differential between Japan and other major economies keeps the so-called carry trade active. Furthermore, Japan's record-high debt-to-GDP ratio continues to fuel fiscal concerns, holding back JPY bulls from placing aggressive bets and acting as a tailwind for the currency pair.

Traders also seem hesitant and opt to wait for the outcome of a two-day Bank of Japan (BoJ) policy meeting on Friday, which will be preceded by the release of the Tokyo CPI report. Investors are betting against a rate increase, although the Japanese central bank is anticipated to retain a hawkish bias amid increasingly sticky inflation, which, in turn, could limit any meaningful JPY depreciation. This suggests that any move up in the EUR/JPY cross is likely to be sold into, though bears need to wait for a break below the trading range before positioning for further losses.