Euro steadies against Japanese Yen as ECB, BoJ rate-hike bets collide

EUR/JPY trades around 184.70 on Wednesday at the time of writing, edging 0.03% lower on the day. The pair struggles to find a clear direction as the Japanese Yen (JPY) benefits from growing expectations of another interest-rate hike by the Bank of Japan (BoJ), while the Euro (EUR) remains supported by prospects of further monetary tightening from the European Central Bank (ECB).

On the Japanese side, investors are increasing their bets on another BoJ rate hike in the coming months. According to Reuters, the Japanese central bank is considering raising interest rates as soon as September, while overnight index swaps are pricing in around an 80% chance of such a move. These expectations support the Japanese Yen and limit EUR/JPY's upside potential for now.

Investors now await the release of Japan's National Consumer Price Index (CPI) on Friday. Inflation remaining persistently above the BoJ's 2% target could reinforce expectations of further monetary tightening and strengthen the Japanese Yen.

However, concerns surrounding Japan's public finances are limiting the currency's appreciation. Japanese Prime Minister Sanae Takaichi has proposed cutting the consumption tax on food to 1% for two years without yet identifying an alternative source of revenue to offset the measure. The proposal fuels concerns about Japan's fiscal trajectory and represents a potential headwind for the Japanese Yen.

Meanwhile, the Euro retains some support following the latest Eurozone inflation data. The Harmonized Index of Consumer Prices (HICP) rose by 2.9% YoY in July, up from 2.8% in June, matching the preliminary estimate and remaining above the ECB's 2% target. Core inflation also accelerated to 2.5% from 2.4%.

The figures reinforce expectations that the ECB will continue its rate-hiking cycle. Markets are now pricing in a 96% chance of a 25-basis-point rate increase in September according to the ECB Watch tool, which would bring the policy rate to 2.5%.

ECB Chief Economist Philip Lane said on Tuesday that Eurozone inflation, at around 3%, remains too high, even if the level appears modest compared with previous peaks. His comments, combined with the latest inflation figures, help the Euro withstand the strength of the Japanese Yen and keep EUR/JPY near 184.70.

BoJ path repriced as Standard Chartered flags earlier hikes and persistent Yen risks

Analysts at Standard Chartered have brought forward their expectations for Bank of Japan tightening, now looking for the BoJ "to hike by 25bps on 18 September from October previously." They also anticipate a more extended cycle, saying "we now expect two more 25bps hikes after September, in Q1- and Q3-2027, from 25bps hikes in October and Q2-2027," which implies "a higher terminal rate of 1.75% in this rate-hike cycle from 1.5% previously." Even so, they caution that "we doubt the BoJ can ‘out-hawk’ the market, which is pricing in a terminal rate of c.2.0% by end-2027."

On the currency side, Standard Chartered reiterates that "we do not rule out further FX intervention in the interim as USD/JPY trades close to 160; we still see USD/JPY at 158 by end-Q3 and 160 by end-Q4 as yield-insensitive capital outflows weigh on the JPY." They note that "the recent Japan-US coordination to stabilise the JPY highlighted a shared concern about the inflationary consequences of excessive currency weakness," underscoring the policy sensitivity around the exchange rate.

The bank also flags several potential challenges to its baseline, warning that "risks to our view include any further hawkish BoJ surprises in the near term, signs of repatriation by local investors and PM Takaichi pivoting away from her preference for dovish policy to boost growth."