EUR/JPY gathers strength above 161.70, eyes on ECB’s Lagarde speech

• EUR/JPY surges to 161.55, the highest level since November 30, 2023. 
• ECB President Christine Lagarde said interest rate cuts might be on the table by the summer. 
• The decline in the Japanese CPI in December reaffirms expectations that the BoJ will maintain its ultra-dovish stance.
• Investors await the December German Producer Price Index (PPI) and the ECB's Lagarde speech on Friday. 

The EUR/JPY cross gathers strength above the mid-161.00s during the early European session on Friday. The cross has reached the highest levels since November 30, 2023, following the release of Japanese inflation data, which might convince the Bank of Japan to maintain the status quo. At press time, EUR/JPY is trading at 161.72, up 0.41% on the day. 

The European Central Bank (ECB) minutes released on Thursday showed that June would be the earliest they might know whether inflation had been controlled. The central bank was worried that market expectations for rate cuts as early as March had loosened financial conditions so much that they “could derail the disinflationary process."

ECB President Christine Lagarde hinted at possible rate cuts at the World Economic Forum in Davos on Thursday. Lagarde said that interest rate cuts might be on the table by the summer, but the central bank remains data-focused. Additionally, the ECB will closely watch the developments surrounding geopolitical tension in the Red Sea as it might impact goods inflation in the eurozone.

On the other hand, the escalating geopolitical tension in the Middle East might provide support to safe-haven assets like Japanese Yen (JPY) and cap the upside of the EUR/JPY cross. 

Apart from this, the BoJ monetary policy meeting next week will be a crucial event and might trigger volatility in the market. The decline in the Japanese Consumer Price Index (CPI) in December reaffirms the market's expectations that the Bank of Japan (BoJ) will maintain its ultra-dovish stance at its monetary policy meeting next week. Early Friday, December Japan’s CPI arrived at 2.6% YoY versus 2.8% prior, while the National CPI ex Fresh Food came in at 2.3% YoY in December from the previous reading of 2.5%.

Looking ahead, the German Producer Price Index (PPI) for December will be released on Friday. Also, the ECB's President Lagarde speech is set to speak and might offer some hints about the further monetary policy path. Next week, attention will shift to the BoJ interest rate decision.