EUR/JPY tops 144 as ECB-BoJ gap widens: 149 in sight?

2022年6月8日

The euro-yen exchange rate (EUR/JPY) hit new year-to-date highs, surpassing the psychological level of 144, as monetary policy divergences between the European Central Bank, which has already widely telegraphed its first rate hike in over a decade, and the Bank of Japan, which remains imprisoned by an extremely dovish monetary policy, widened further.

The sspread between the yield on a German 2-year bond and the Japanese equivalent – which acts as a proxy for measuring monetary policy divergences between countries – has now reached 0.7%, the highest since August 2011, exerting upward pressure on the EUR/JPY exchange rate.

The Eurozone is now experiencing more inflationary pressures than Japan. Annual inflation in the Eurozone surged to 8.1% in May 2022, a new record high and well above market expectations of 7.7%, while consumer prices in Japan only grew by 2.5% year on year in April 2022.

While the Bank of Japan can still tolerate the yen's depreciation – which has lost 16% versus the dollar and 11% against the euro since the start of the year– due to the presence of a relatively contained inflation, the ECB no longer has this luxury.

The market is anxiously awaiting the ECB's meeting tomorrow. A rate rise in July is already priced in, and additional hawkish signals (such as leaving the door open to a 50 basis point raise or not ruling out quantitative tightening by the end of the year) may provide additional support for the euro versus the Japanese yen.

Next barrier is 4% away at 149 levels, which corresponds to the EUR/JPY pair's December 2014 highs. Beyond this level, one may consider 153.8, which served as a major support level from 2007 to September 2008.