EUR/JPY: Euro Advances On Opposing ECB And BOJ Outlooks

Expectations that the European Central Bank would refrain from cutting borrowing rates from record lows today are deemed to buoy the euro alongside the Japanese yen today. Recent signs of stabilization in the eurozone economy and the desire to keep pressure on governments to resolve the crisis are seen to incite the central bank to hold fire. Contrastingly, the yen is believed to be weighed by increased expectations that the Bank of Japan will respond to Prime Minister Shinzo Abe’s call to unveil more aggressive easing.

The ECB is likely to usher in 2013 by keeping interest rates steady for a sixth straight month amid encouraging signs that the eurozone economy is bottoming out. Likewise, analysts say that with its latest anti-crisis weapon ready and primed for action, ECB President Mario Draghi will insist once again that only government can resolve the long-running crisis. In the ECB’s meeting last month, Draghi expressed that they had a “wide discussion” of cutting rate before opting to keep them unchanged. Nonetheless, economic reports since then have proved rather encouraging.

Last week, the closely watched Purchasing Managers Index for the eurozone improved to its best reading in nine months, offering hope that the economy could be moving out of its deep double-dip recession. Recent data for Germany, the region’s powerhouse, have also come in better than estimated. Business confidence has also improved, suggesting that the worst of the downturn is already behind.

Today, economic releases from France, the eurozone’s second largest economy, are believed to validate a rate retention today. Industrial output in the nation is said to have inclined by 0.2 percent in November after falling 0.7 percent in October, potentially its first rise in three months.

Meanwhile, price pressures are seemingly on the rise in France, with the CPI estimated to rise by 0.4 percent in December after dipping by 0.2 percent in the previous month. As such, although Draghi is expected to reiterate that the ECB stands prepared to do more if necessary as conditions remain fragile, he could strike a more positive tone by recognizing the recent stabilization in the economy.

In contrast, the Bank of Japan is widely expected to respond to increasing pressure to move the country out of deflation and its recession. Convening the Council on Economic and Fiscal Policy for the first time yesterday, Prime Minister Abe formally called on the BOJ to double its inflation target to 2 percent.

As such, sources say that the central bank is seriously considering easing policy again in its meeting on January 21 and 22. Any easing will likely take the form of another increase in the BOJ’s asset buying and lending program or an increase in its inflation target. With the opposing outlooks for both central banks, a long position is recommended for the EUR/JPY trades today.