EUR/JPY Steadies as Markets Weigh ECB and BOJ Rate Hike Prospects

EUR/JPY traded steady on Monday, hovering around 185.66, as markets digested the future policy paths of the European Central Bank and the Bank of Japan. Strong inflation data from Japan earlier provided a brief boost to the yen, but that support was quickly offset by broader concerns over the yen's fundamental outlook.

**Inflation Data Fails to Reverse Yen Weakness**

Japan's inflation figures released last Friday exceeded expectations, reinforcing market bets on an imminent BOJ rate hike. According to CME Group analysis, the BOJ is widely expected to raise rates by 25 basis points to 1% at this week's meeting. However, this hawkish expectation has failed to meaningfully reverse the yen's downtrend. Market data shows USD/JPY has been hovering near the 160 official intervention line, suggesting investors remain reluctant to build large long positions in the yen despite the anticipated hike.

**Rate Differentials and Fiscal Concerns Weigh on Yen**

The core reason for the yen's weakness lies in the substantial interest rate gap between Japan and major economies. Even if the BOJ delivers the expected hike, Japan's rates would remain extremely low compared to the U.S. and Europe, keeping the yen as a favored funding currency for carry trades. Additionally, concerns over Japan's fiscal situation have further pressured the yen. Dingxin Huijin analyst Sun Yini noted that the BOJ's expected move is more of a reactive response to yen depreciation and imported inflation rather than a proactive tightening cycle.

**Euro's Outlook Constrained by External Factors**

For the euro, despite the ECB having already signaled hawkish intentions and delivered rate hikes, EUR/USD has faced resistance at the 1.16 level, indicating limited upside momentum. CME Group analysis suggests the ECB's hawkish stance has been largely priced in by the market. The euro's near-term trajectory remains tied to dollar strength. Against this backdrop, EUR/JPY is likely to continue consolidating around current levels in the short term, awaiting clearer directional cues from this week's central bank decisions.