EUR/JPY continues to rally on ECB and BoJ central bank divergence

• EUR/JPY extended its rally on central bank divergence between the ECB and the BoJ.
• BoJ’s decision to keep rates unchanged and maintain the YCC weighed on the JPY.
• Market participants estimate the ECB will raise rates by 25 or 50 bps.

The EUR/JPY remains rallying sharply to multi-year highs at 150.94, sponsored by central bank divergence, with the European Central Bank (ECB) expected to raise rates, while the Bank of Japan’s (BoJ) kept its policy unchanged. In addition, a risk-on impulse dented the appetite for safe-haven assets. At the time of writing, the EUR/JPY is trading at 150.93 after hitting a low of 150.02.

On Monday, a late risk-off impulse weighed on Wall Street as it registered minuscule losses. Last Friday, the BoJ’s decision to keep rates unchanged spurred a jump of more than 1.50%, or 240 pips, in the pair. However, the newest BoJ Governor, Kazuo Ueda, revealed that the central bank would conduct a review of its monetary policy.

Regarding its forward guidance, the BoJ removed to pledge to keep rates at “current or lower levels.” Uzeda’s added that if the central bank needs to shift policy, it will do it, regardless of finishing the review of the non-conventional use of monetary policy for 25 years.

On the ECB’s side, the ECB is expected to raise rates by 25 bps, though some ECB hawks are still pushing for a 50 bps increase. However, after Tuesday’s report of inflation in the EU, ECB policymakers would have a clearer view, alongside the release of S&P Global Manufacturing PMIs in the bloc.

TD Securities analysts estimate a 25 bps rate hike. They noted, “March lending data, and the ECB’s Q1 Bank Lending Survey, we expect the majority will opt for 25bps, with some clear hawkish dissents. Country-level inflation and growth data appear to have lessened the risk of a 50bps hike, but a material positive surprise in the BLS could still be enough to tip the decision. If the ECB hikes 25bps, the tone of the statement and press conference will likely be more important than the hike itself.”

EUR/JPY Technical Levels