Euro steadies against Japanese Yen as ECB rate hike expectations strengthen

Euro and Japanese Yen maintain relative stability as European Central Bank (ECB) rate hike expectations grow stronger. The Euro (EUR) finds support against the Japanese Yen (JPY) due to inflation risks driven by energy prices strengthening confidence that the ECB will hike interest rates again in September. A Reuters poll from August 10-13 reveals that 57 out of 69 economists anticipate a 25 basis points (bps) increase to 2.5% at the ECB's September meeting, with around 80% expecting the rate to finish the year at 2.5%.

Meanwhile, 63% believe the rate will stay at that level until at least the third quarter of the following year. Money markets also price in a near 90% probability of a 25 bps hike in September, reinforcing EUR/JPY's support. Eurozone industrial production remained unchanged in June compared to expectations of a 0.1% contraction, resulting in a mixed outlook for the Eurozone economy.

Meanwhile, energy-driven inflation risks keep investors focusing on the ECB's monetary policy trajectory. Japan's Yen continues to face challenges due to wide interest rate differentials, fiscal concerns, and rising import costs. However, cautiousness surrounding potential foreign exchange intervention limits significant EUR/JPY moves, although it has not reversed the fundamental pressures on the Japanese currency.

MUFG analysts note that policymakers are aligning on the need for a near-term BoJ rate hike, with a Bloomberg report indicating Prime Minister Takaichi's government supports a possible hike in either September or October. The report suggests that BoJ fears over yen weakness driving up prices and the government's desire to strengthen the impact of recent US-Japan intervention are converging on this decision.