Euro Edges Lower Against Yen but Holds Within Range Ahead of ECB and BoJ Policy Updates

• Thursday brings renewed selling in EUR/JPY, but the cross stays within its established range.
• With France facing a fiscal crisis, traders await the ECB decision for a fresh catalyst.
• Friday’s Tokyo CPI release and crucial BoJ policy announcement will be the next focus.

With the European Central Bank (ECB) policy announcement approaching, traders are waiting for a fresh catalyst for EUR/JPY. Renewed selling on Thursday has halted the previous day’s modest recovery from around 175.40, the weekly low. Nevertheless, through the first half of the European session, the cross remains within the range that has held for roughly the past week.

An unchanged decision on policy rates is widely anticipated from the ECB, alongside a continued hawkish bias towards a possible 25-basis-point (bps) increase in December. Attention will also centre on the accompanying policy statement and the subsequent press conference, with remarks by ECB President Christine Lagarde expected to influence the single currency. Any initial market response is likely to be subdued, however. Severe political and fiscal turmoil in France may lead the ECB to avoid explicit forward guidance in order to retain flexibility over policy.

Together with renewed buying of the US Dollar (USD), this weighs on the single currency and is regarded as a key source of downward pressure on EUR/JPY. The Japanese Yen (JPY), however, continues to lag its peers: the sizeable interest rate gap between Japan and other major economies sustains the so-called carry trade. Japan’s record-high debt-to-GDP ratio also keeps fiscal concerns in focus. That discourages JPY bulls from taking aggressive positions and provides support for the currency pair.

Ahead of Friday’s conclusion to the two-day Bank of Japan (BoJ) policy meeting, traders appear reluctant to commit and prefer to await the outcome. The Tokyo CPI report is due before the decision. Although investors are positioning against a rate rise, the Japanese central bank is expected to maintain a hawkish stance as inflation becomes increasingly persistent, potentially restricting any substantial JPY weakness. Against that backdrop, advances in EUR/JPY are likely to attract selling. Bears, however, need a break below the trading range before positioning for additional declines.