EUR/JPY edges higher as policy caution, Middle East war temper Yen strength

• EUR/JPY trades around 186.70 with a modest gain at the end of the week.
• Markets expect major central banks to hold rates steady while highlighting persistent inflation risks.
• Middle East tensions and uncertainty around Japanese policy shape Yen dynamics.

EUR/JPY trades around 186.70 on Friday, posting a modest 0.06% gain as investors remain cautious ahead of a week marked by monetary policy decisions from several major central banks. The pair is supported by a broadly resilient Euro (EUR), while facing mixed flows on the Japanese Yen (JPY).

Market expectations indicate that interest rates will remain unchanged from both the Bank of Japan (BoJ) and the European Central Bank (ECB), with guidance emphasizing a data-dependent approach. However, the recent rise in energy prices, driven by the prolonged closure of the Strait of Hormuz, is fueling upside inflation risks, potentially complicating any near-term easing outlook.

Within the ECB, some policymakers remain cautious but open to further tightening if needed. Governing Council member Gediminas Simkus stated that a rate hike this year cannot be ruled out, while dismissing the possibility of a cut at the April 30 meeting. This stance provides support to the Euro, despite weakening economic indicators.

Indeed, the latest data from Germany highlight a sharper-than-expected deterioration in business sentiment. The IFO Business Climate Index declined to 84.4 in April, below expectations, indicating a worsening economic outlook in the Eurozone’s largest economy and limiting the Euro’s upside potential.

In Japan, the Japanese Yen remains influenced by conflicting factors. On one hand, speculation about potential intervention and comments from the Finance Ministry offer some support to the currency. On the other, economic concerns tied to rising energy prices and disruptions in the Strait of Hormuz weigh on confidence.

The Bank of Japan (BoJ) is expected to keep its policy rate unchanged at 0.75% at its upcoming meeting, while leaving the door open to future tightening. Recent inflation data show moderate progress, with headline inflation at 1.5% YoY and core measures still below the 2% target, justifying a cautious stance.