Rate differential between Eurozone, Japan boosts EUR/JPY

EUR/JPY continues to rise, up 0.23% at the time of writing, due to a wide interest-rate differential between the Eurozone and Japan, which favours the Euro over the Japanese Yen. The absence of direct intervention by Japanese authorities to strengthen the Yen in early May has led to the pair drifting higher. The Bank of Japan’s decision not to repeat a reduction in its bond buying operations on May 17 despite doing so on May 13 further led the JPY to weaken.

Weak data releases in Japan, including a 2.0% annualized drop in Q1 GDP, lower Tokyo CPI, and weak wage growth data in Q1, suggest that the BoJ will probably delay its next interest rate hike after a one-off raise in March, giving EUR/JPY a back wind. The Euro is strengthening as positive data for the region suggests the ECB will not need to cut interest rates as quickly as previously thought to stimulate economic growth.

Q1 GDP data showed a 0.3% rise after two quarters of contraction and the strongest quarter of growth since Q3 of 2022. The ECB is widely expected to cut interest rates in June, but recent comments from board member Isabel Schnabel suggested that the governing council might not follow up the cut in June with a cut in July.

Rate-cutting plans were approved by ECB policymaker Martin Kazaks on Monday. He stated that inflation was progressively approaching the ECB’s 2.0% target but cautioned that the process of reducing interest rates must be done gradually and not all at once.