EUR/JPY weakens to 161.00 as ECB holds key lending rates steady at 4.5% as expected

• EUR/JPY plummets to 161.00 as the ECB keeps lending rates unchanged at 4.5% as expected.
• The ECB has revised down inflation forecasts and near-term growth projections.
• Investors see the BoJ exiting dovish rate stance sooner.

The EUR/JPY pair witnesses an intense sell-off, falling to 161.00 in Thursday’s early New York session. The asset drops as the European Central Bank (ECB) has kept its Main Refinancing Operations Rate unchanged at 4.5% for the fourth time in a row.

Market participants widely anticipated the ECB's decision to maintain a steady interest rate. ECB policymakers have reiterated that the central bank will not shift to policy normalization until it is confident that inflation will sustainably fall below the 2% target.

Meanwhile, the ECB has also released growth forecasts for 2025 and 2026. The ECB staff expect the economy to pick up and to grow at 1.5% in 2025 and 1.6% in 2026, supported initially by consumption and later also by investment. The ECB has revised down growth rate projections to 0.6% for the current year. The ECB expects that near-term performance will be subdued.

Projections for core inflation that exclude volatile energy and food prices have also been revised down to 2.6% for 2024, 2.1% for 2025, and 2.0% for 2026.

Going forward, investors will focus on the monetary policy statement from ECB President Christine Lagarde. Market participants want to know when the ECB is expected to start reducing interest rates.

The major reason behind a sharp sell-off in the EUR/JPY pair is the sheer strength in the Japanese Yen on firm Bank of Japan (BoJ) rate hike bets. The expectations for the BoJ exiting the negative interest rates territory rose after BoJ board member Junko Nakagawa said “prospects for the economy to achieve a positive cycle of inflation and wages are in sight.”