Market Analysis

With strong dovish predictions from the ECB, EUR/JPY drops from its seven-week high of 163.50

Amos Simanungkalit · 07 Oct 202411.3K Views

The EUR/JPY currency pair has experienced a sharp decline from a seven-week high of approximately 163.50, dropping to around 162.70 during Monday’s European session. The weakening of the cross is largely attributed to mounting pressure on the Euro (EUR), driven by rising speculation that the European Central Bank (ECB) may implement further cuts to its key borrowing rates in the upcoming policy meeting on October 17.

On September 12, the ECB reduced its Rate on Deposit Facility by 25 basis points (bps) to 3.5%, marking its second dovish decision in this current cycle of policy easing. With concerns growing over the potential for monetary policy to remain restrictive for an extended period, more rate cuts are anticipated this month. Such a scenario suggests that weak economic growth may persist, coupled with declining confidence regarding inflation meeting the bank’s 2% target.

In an interview with La Repubblica over the weekend, François Villeroy de Galhau, a policymaker at the ECB and Chief of the French Central Bank, stated, "If we sustainably achieve 2% inflation next year, and given the ongoing sluggish growth outlook in Europe, there would be no justification for our monetary policy to remain restrictive or for rates to exceed the neutral interest rate."

Additionally, a steeper-than-expected decline in German Factory Orders for August has highlighted weakening demand, further emphasizing the necessity for additional policy easing. Factory Orders dropped by 3.9% year-on-year after a 4.6% increase in July, while new Factory Orders fell by a surprising 5.8% month-on-month.

In Japan, tensions between Israel and Iran in the Middle East have triggered safe-haven flows towards the Japanese Yen (JPY). Furthermore, the Yen has gained strength amid renewed concerns over potential intervention, as indicated by comments from Japan's Finance Ministry Vice Minister for International Affairs, Atsushi Mimura, during Monday’s Asian session.