EUR/JPY declines to near 161.00 as BoJ keeps door open for rate hike

• EUR/JPY loses traction to around 161.10 in Tuesday’s early European session, losing 0.62% on the day. 
• The BoJ is anticipated to raise rates to the highest in 17 years. 
• The ECB's dovish bets weigh on the shared currency. 

The EUR/JPY cross falls to near 161.10 during the early European session on Tuesday. The Japanese Yen strengthens against the US Dollar (USD) due to the rising speculation that the Bank of Japan (BoJ) will raise interest rates at its policy meeting on Friday. Later on Tuesday, Germany’s ZEW Survey for January will be released.

The BoJ is anticipated to hike interest rates in the upcoming monetary policy meeting, with the markets pricing in nearly a 92% odds of a move by the conclusion of the January 23-24 policy meeting. This would lift short-term borrowing costs to levels unseen since the 2008 global financial crisis.

On Tuesday, Japan’s Vice Finance Minister for International Affairs and top foreign exchange official, Atsushi Mimura, said, “The US economy outlook’s up to Trump’s macroeconomic policies.” Meanwhile, Japan’s Finance minister, Katsunobu Kato, stated that the officials will closely watch the impact of US policies on Japan and the world economy, adding that he expects the Japanese central bank to conduct monetary policies appropriately to achieve the 2% inflation goal.

On the other hand, the dovish expectations for the European Central Bank (ECB) could drag the Euro (EUR) lower against the JPY. According to the ECB Monetary Policy Meeting Accounts released on Thursday, policymakers agreed in the December meeting that interest rate cuts should be approached cautiously and gradually, but they also noted that further rate cuts were likely coming given weakening price pressures. Traders expect the ECB will deliver a 25 basis point (bps) rate cut at each of the next four ECB policy meetings, driven by concerns over the Eurozone’s economic outlook and the belief that inflationary pressures will remain subdued.