EUR/JPY drifts higher to 161.50 following BoJ rate decision

• EUR/JPY trades on a stronger note near 161.50 after BoJ rate decision. 
• The BoJ held the interest rate and 10-year JGB yield target steady, allowing the 10-year JGB to move up to around 1.0%.
• The European Central Bank (ECB) will announce an interest rate decision on Thursday, with no changes in policy expected. 
• Investors await the German, Eurozone HCOB PMI reports ahead of the ECB rate decision.

The EUR/JPY cross gathers strength during the early European session on Tuesday. The Bank of Japan (BoJ) expectedly retained its ultra-loose monetary policy at its January meeting while cutting its core inflation forecast for the next fiscal year. At press time, EUR/JPY is trading at 161.50, up 0.23% on the day.

According to a policy statement on Tuesday, the BoJ decided unanimously to keep interest rates at -0.1% and maintain its yield curve control policy that keeps the upper limit for 10-year Japanese government bond yield at 1.0% as a reference. Furthermore, BOJ board members lowered their median growth forecast for core consumer prices to 2.4% for fiscal 2024 starting this April, compared with 2.8% they estimated in October, according to its BoJ quarterly report.

Traders will keep an eye on BoJ Governor Kazuo Ueda's speech during the press conference. Ueda may provide some insights about when and how the 'normalization' process and the transition away from negative interest rates will occur this year. The markets anticipate the Japanese central bank to exit its negative rates regime at its April meeting at the earliest. 

On the Euro front, the European Central Bank (ECB) is likely to maintain its benchmark policy on Thursday as ECB President Lagarde signaled in Davos that the first cut may come in the summer months of 2024. The markets expect the first ECB policy rate cut in April, with a total reduction of 135 basis points (bps) by the end of 2024.  

The Japanese Trade Balance, and HCOB Purchasing Managers Index (PMI) from France, Germany, and the Eurozone, are due on Wednesday. Market participants will closely monitor the ECB monetary policy meeting and press conference on Thursday. These events could give a clear direction and trading opportunities around the EUR/JPY cross.