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

The Euro steadied at 184.70 against the Japanese Yen on Wednesday, fluctuating slightly throughout the day. The pair faced difficulty in determining its overall direction, as the Japanese Yen received support from expectations of a potential interest rate hike by the Bank of Japan (BoJ), while the Euro benefited from prospects of further monetary tightening from the European Central Bank (ECB).

Japanese investors anticipated another BoJ rate hike in the near future, with overnight index swaps pricing in an 80% chance of such a move. This increased optimism led to a stronger Japanese Yen and a limited upside for the EUR/JPY pair. Investors awaited Japan's National Consumer Price Index (CPI) release on Friday, which could further reinforce the currency's strength if inflation remained above the BoJ's 2% target.

However, concerns over Japan's fiscal situation posed a challenge to the yen's upward potential. Meanwhile, the Euro maintained support following Eurozone inflation data, with the Harmonized Index of Consumer Prices (HICP) rising by 2.9% year-over-year in July, exceeding the ECB's 2% target. This data strengthened the case for additional rate hikes by the ECB, with traders pricing in a 96% chance of a 25-basis-point increase in September.

Despite this, traders cautioned that the BoJ might find it challenging to outpace market expectations for a terminal rate of around 2.0% by the end of 2027.