Ahead of ECB, BoJ policy updates, Euro slips against Yen but stays range-bound

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

Renewed selling pressure halts the EUR/JPY cross’s modest recovery on Thursday, following the previous day’s rebound from the weekly low near 175.40. Despite this pressure, spot prices continue to trade within the range established over the past week or so during the first half of the European session. Traders are awaiting the European Central Bank (ECB) policy announcement for fresh direction.

An unchanged policy rate is widely anticipated from the ECB, alongside a continued hawkish inclination towards a possible 25-basis-point (bps) increase in December. Markets will also scrutinise the accompanying policy statement and post-meeting press conference, with remarks from ECB President Christine Lagarde expected to influence the shared currency. However, the initial market response is likely to be subdued. Faced with severe political and fiscal turmoil in France, the ECB might avoid explicit forward guidance to retain flexibility in its policy decisions.

The shared currency is weighed down by this backdrop and renewed buying in the US Dollar (USD), factors seen as key sources of downward pressure on EUR/JPY. The Japanese Yen (JPY), however, remains a relative underperformer. A substantial interest rate gap between Japan and other major economies continues to sustain the so-called carry trade. Adding to this, Japan’s record-high debt-to-GDP ratio keeps fiscal worries alive, discouraging JPY bulls from taking aggressive positions and providing support to the currency pair.

A cautious approach also appears to prevail among traders ahead of Friday’s conclusion of the two-day Bank of Japan (BoJ) policy meeting, with the Tokyo CPI report due beforehand. Although investors are betting against a rate hike, the Japanese central bank is expected to maintain a hawkish stance as inflation becomes increasingly sticky. This could restrict any significant weakening in the JPY. The implication is that advances in EUR/JPY are likely to attract selling, but bears need to see a break below the trading range before positioning for additional declines.