BOJ and Euro CPI Potential Impact on EURJPY

The BOJ meets in its slow advance towards tightening while the Euro Area is expected to confirm slowing inflation. Could this turn into a trend for the EURJPY to reach 150 next year?

Slowly Moving Away From Ultra Easing

The markets generally expect the BOJ to move into tightening mode and end its status as the last central bank in negative rate territory. Just not too soon. The broad consensus is that there will be no change in policy at this year's last BOJ meeting, but as usual, the focus will be on comments that could give some insight into how fast the bank intends to go towards tightening. Of particular interest is the potential clarification of recent remarks from officials that were deemed to be hawkish.

In the lead-up to the meeting, Deputy Governor Ryozo Himino gave a speech extolling the economic benefits of exiting ultra-easing in an action that was seen as a continuation of laying the groundwork for a potential rate hike next year. That view was accelerated a couple of days later when Governor Kazuo Ueda remarked that monetary policy management would be "more challenging" starting next year, which led to speculation that rate lift-off would be even sooner. Thus, the theme of the meeting seems to be "seeking clarity", which could include the BOJ giving guidance about how soon the rate lift-off is coming. Governor Ueda has said that policy moves wouldn't come suddenly, like under his predecessor, but what exactly that forward guidance will look like isn't clear.

The Euro On the Slippery Slope

A little later, the Euro Area will release its final measure of CPI for November, which is expected to confirm the drop in the headline inflation rate to 2.4% from 2.9% recorded in October. The ECB is more inclined towards the headline inflation rate than other central banks. The core CPI change is also expected to be confirmed at 3.6%, down from 4.2% prior. The recent drop was reported before the latest central bank meeting and is likely to maintain the current narrative where the shared central bank is increasingly concerned about economic growth.

The market is pricing in around a 65% probability of a rate cut by the ECB as early as March next year, which has kept the shared currency under pressure. Combined with the potential for strength from the yen, MUFG forecasts that EURJPY will fall below the 150 handle early next year. With a sparse economic calendar going through the rest of the month due to the holiday season, the upcoming data points might set the trend in motion.

EURJPY Eyes Major Support?

So far, price action suggests a downward trend may be in place, at least for the beginning of next year. The pair ended its upward move to a 2008 high at 164.30, following a 100% movement from the triangle's opening range top at 148.40. Testing new lows below 154.40 may open the door to 151.67 next, bringing the round support into the spotlight. However, the impulsive downward leg could be pointing to pullbacks, with a break past 157.68 increasing the chances of a right-shoulder swing towards 159.78.

Source: SpreadEx / EURJPY

Key Takeaways

The BOJ is expected to move towards tightening its monetary policy, but no changes are anticipated at the upcoming meeting. The focus will be on comments that could signal the timing of tightening. On the other hand, the Euro Area is facing slowing inflation, with the expected confirmation of a drop leading to speculation of a potential rate cut next year. Despite the market pricing in a high probability of a rate cut, which could pressure the euro, MUFG forecasts EURJPY will fall below 150 next year.