ECB Rate Decision: Inflation, Tariffs, and Market Sentiment Impact on EUR/JPY
The European Central Bank (ECB) is scheduled to announce its interest rates and monetary policy statement on March 6th, 2025, followed by its standard press conference. The meeting occurs during a period of heightened market uncertainty due to trade wars and tariff implications. The Eurozone inflation indicator, the Harmonized Index of Consumer Prices (HICP), rose from its low of 1.7% in September 2024 (a 5-year low) to 2.5% in December 2024. This increase in HICP was mainly due to rising costs in housing, energy, and transportation. The Core HICP remained steady at 2.7% during the same period.
EZ HICP – Source: https://ec.europa.eu/eurostat/en/
The increase in inflation, along with concerns about the impact of US tariffs on Eurozone inflation, may affect market sentiment. According to Bloomberg analyst surveys, 97.5% of participants expect the ECB to cut rates by 25 basis points at its March 6th, 2025, meeting. This is down from 135.0% on January 30th, 2025, when markets anticipated a possible 50 basis point cut.
Japanese Yen (JPY) Strength: Inflation, Interest Rates, and BOJ Policy Impact on USD/JPY
The Japanese Yen has gained some strength against the US dollar in early 2025, rising approximately 6% as of early January 2025. While 6% is a significant move in currency trading, it is small compared to the Yen’s 35% weakness against the US dollar, which began in early 2021 and ended in July 2024.
Source: https://www.tradingview.com/chart/5SnueDXH/
The recent upward move was supported by a slower-than-anticipated interest rate cut path by the Federal Reserve and an increase in Japan’s inflation to a 2-year high of 4%, suggesting that BOJ’s rate hikes could be on the horizon. The Bank of Japan (BOJ) Policy rate decision is scheduled for March 18th, 2025, a day before the FOMC statement and the federal funds rate announcement. Last week, Bank of Japan Governor Kazuo Ueda stated in parliament that the “BOJ would buy bonds nimbly if yields rise sharply.” According to Bloomberg analyst surveys, expectations for a 25 basis point interest rate hike at the BOJ’s March 18th, 2025, meeting stand at only 1.8%, down from 38.7% in December 2024.
EUR/JPY Technical Analysis: Ascending Channel Breakout, Head and Shoulders Pattern, and Flag Formation
Source: https://www.tradingview.com/chart/PxTXLbsa/
EUR/JPY Weekly Japanese Candlestick Chart
- EUR/JPY has been trading within an ascending channel since mid-2020. Price action broke and closed below the channel, followed by two pullbacks (PB1 and PB2). Both attempts met resistance along the channel border extension. Two more pullbacks followed (PB3 and PB4), but a shortfall occurred as the price was unable to reach the channel border. The four pullbacks together completed a complex head and shoulders pattern, which had already broken below its neckline and reached its technical target.
- The overall price action following the breakout below the ascending channel completed a flag formation, a continuation chart pattern. (The flag chart pattern is highlighted in yellow.)
- A potential exhaustion downward gap formation took the price down to the head and shoulders technical target at the market open on February 3rd, 2025, following President Trump’s tariff announcement regarding Canada and Mexico.
- Currently, price action is at a confluence of support represented by the lower side of the flag formation and support level S1 of 157.07, where it previously found support in September 2024. (Purple arrows)
- Price is trading below its moving averages (EMA9, SMA9, and SMA20). The three moving averages intersect with the gap formation near the monthly pivot point of 161.88, forming a confluence of resistance above the price action.
- The default RSI 14 is at level 40 and approaching oversold territory, and the MACD line remains below its signal line.
Considering the confluence of technical factors, including the ascending channel breakout, head and shoulders pattern, and flag formation, along with the fundamental factors of ECB and BOJ policy decisions and inflation rates, EUR/JPY presents a complex trading landscape. Traders should closely monitor key support and resistance levels, moving averages, and momentum indicators like RSI and MACD. Robust risk management strategies are essential to navigate the potential volatility and capitalize on opportunities while mitigating downside risk.