Euro stays rangebound as Yen gains ahead of ECB, BoJ policy updates

• Fresh selling weighs on EUR/JPY on Thursday, but the pair stays within its established range.
• With France facing a fiscal crisis, traders await the ECB decision for a fresh catalyst.
• Friday’s Tokyo CPI release and pivotal BoJ policy announcement will be the next focus.

The 175.40 area marked the weekly low for EUR/JPY. Thursday brings renewed selling, interrupting the previous day’s modest recovery from that level. Through the first half of the European session, however, spot prices continue to trade within the range established over the past week or so. Traders are awaiting the European Central Bank (ECB) policy announcement for fresh direction.

Expectations are firmly for the ECB to leave policy rates unchanged while retaining a hawkish stance on a possible 25-basis-point (bps) increase in December. Attention will also centre on the policy statement and subsequent press conference. Remarks by ECB President Christine Lagarde should influence the euro. Any initial market response is nevertheless likely to be limited: with France facing severe political and fiscal turmoil, the ECB may avoid explicit forward guidance to retain policy flexibility.

Alongside renewed buying of the US Dollar (USD), this backdrop weighs on the euro and is viewed as a key source of downward pressure on EUR/JPY. The Japanese Yen (JPY), however, remains a relative underperformer. Wide interest rate differentials between Japan and other major economies continue to sustain the so-called carry trade. Japan’s record-high debt-to-GDP ratio also keeps fiscal concerns elevated. This discourages aggressive bullish JPY positions and provides support for the currency pair.

Ahead of Friday’s outcome of the two-day Bank of Japan (BoJ) policy meeting, traders also appear reluctant to commit. The Tokyo CPI report is due before the decision. Although investors are positioning against a rate increase, increasingly persistent inflation is expected to keep the Japanese central bank’s stance hawkish, potentially restricting any substantial JPY weakness. EUR/JPY rallies are therefore likely to encounter selling. Bears, however, need a break below the trading range before positioning for additional declines.