EUR/JPY finds temporary support as ECB cuts Deposit Facility rate by 25 bps to 2.5%

• EUR/JPY discovers temporary support near 159.20 after the ECB’s dovish interest rate decision.
• The ECB reduced its Deposit Facility rate by 25 bps to 2.5%, as expected.
• Surging Japanese bond yields have strengthened the Japanese Yen.

The EUR/JPY pair finds temporary support after sliding more than 0.75% intraday to near 159.20 in Thursday’s North American session. The asset discovers little demand as the European Central Bank (ECB) has reduced its Deposit Facility rate by 25 basis points (bps) to 2.5%. This is the fifth interest rate cut by the ECB in a row.

The ECB was already expected to ease its monetary policy further as inflation in the Eurozone is on track to return sustainably to the desired rate of 2% this year. Some ECB officials are also seeing risks of inflation undershooting the central bank’s target of 2% due to weak demand from domestic and overseas markets.

In the last two trading sessions, the Euro (EUR) outperformed its major peers as Germany’s likely next chancellor, Frederich Merz, and the Social Democratic Party (SDP) agreed to create a 500 billion Euro (EUR) infrastructure fund and stretch borrowing limit on Tuesday. Investors expect such reforms could prompt inflationary pressures and stimulate the economy.

Meanwhile, the Japanese Yen (JPY) outperforms across the board as 10-year Japan Government bond (JGB) yields post a fresh 15-year year high, with traders becoming increasingly confident that the Bank of Japan (BoJ) will raise interest rates again this year. 10-year JGB yields rise to near 1.55%.

On Wednesday, BoJ Deputy Governor Shinichi Uchida said that the central bank will adjust its monetary policy further if the economy and inflation continue to perform in line with expectations.