Euro rallies further above 185.00 against Japanese Yen after BoJ’s policy decision

• The Euro surges further against the Japanese Yen to near 185.20 after the BoJ leaves interest rates unchanged at 1%.
• The BoJ reiterates the hawkish stance on interest rates while warning of upside inflation risks.
• Investors await the Eurozone flash HICP data for July.

The Euro (EUR) extends the intraday rally to near 185.20 against the Japanese Yen (JPY) after the Bank of Japan’ (BoJ) monetary policy decision during the Asian trading session on Friday. The BoJ has kept interest rates steady at 1%, as expected, with an 8-1 majority.

BoJ member Hajime Takata dissented from the vote to hold and favored a 25 basis points (bps) interest rate hike to push rates to 1.25%.

The Japanese central bank has warned that medium-to-long-term inflation expectations are set to climb and has reiterated that the monetary policy path will remain on the upside. “Will keep raising interest rates in response to economic, price trends and financial conditions,” BoJ said.

The BoJ was already anticipated to do so as it is unlikely to deliver back-to-back rate hikes to build pressure on the economy. In the June meeting, the Japanese central bank raised borrowing rates by 25 basis points (bps) to 1%, the highest level not seen since 1995.

On the Eurozone front, investors await the preliminary Harmonized Index of Consumer Prices (HICP) data for July, which will be published at 09:00 GMT. The inflation data from Germany and Spain showed on Monday that inflationary pressures grew at a faster-than-expected pace.

According to TD Securities, Eurozone inflation is likely to firm only modestly in the latest print, with the bank expecting “euro area HICP to pick up only slightly to 2.9% y/y (mkt: 2.9%; prior: 2.8%), as the recent rebound in energy is largely offset by softer food and core goods prices.” The analysts note that “airfares may provide some upside given higher jet fuel costs and the start of the summer holiday season,” but they judge that “broader services HICP is likely to remain contained, with limited evidence so far of a wider pass-through of the energy shock.” In this context, TD Securities concludes that “we see the core inflation number remaining steady at 2.4% y/y (mkt: 2.4%, prior: 2.4%).”

Signs of acceleration in inflationary pressures in the Eurozone would prompt expectations of more interest rate hikes by the European Central Bank (ECB) in the near term.

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