EUR/JPY declines towards 155.00 amid anxiety ahead of ECB-BoJ policy

• EUR/JPY is declining towards 155.00 as investors turn cautious ahead of the ECB-BoJ interest rate policy.
• An interest rate hike in July seems necessary for the ECB, knowing the fact that wages are still elevated and global oil prices are recovering.
• In spite of rising wages due to changes in corporate behavior, BoJ needs more time for a sustained move above 2%.

The EUR/JPY pair has come out of the woods and is declining towards the immediate support of 155.00 in the European session. The cross is expected to remain volatile ahead of the interest rate policies by the European Central Bank (ECB) and the Bank of Japan (BoJ), which are scheduled for July 27 and July 28 respectively.

Inflationary pressures in Eurozone have softened from its peak of 10.6% to 5.5% reading in June but are still far from the desired rate of 2%. Therefore, ECB President Christine Lagarde would raise interest rates by 25 basis points (bps) to 4.25%. An interest rate hike in July seems necessary for the ECB, knowing the fact that wages are still elevated and global oil prices are recovering after a long time.

A recovery in the oil prices would propel headline inflation, therefore, making an interest rate hike in September a possibility.

Meanwhile, firms in Eurozone are facing the wrath of higher interest rates by the ECB. In its quarterly survey of 158 big banks, the European Central Bank (ECB) highlighted that “firms' demand for credit dropped to lowest since the survey started in 2003.”

On the Japanese Yen front, BoJ Governor Kazuo Ueda is expected to continue its dovish policy stance as inflation will take time in sustaining confidently above 2%. In spite of rising wages due to changes in corporate behavior, BoJ needs more time for a sustained move above 2%.

The Japanese government is out with its outlook on the country’s inflation, noting that inflation is seen staying around 0.7% in the longer term. “Wages are projected to increase by 2.5% in FY24, following a 2.6% jump in FY23,” the government said.