Although core inflation has been revised upward, growth concerns remain a key issue in the Eurozone. Additionally, weak global economic conditions and geopolitical factors continue to weigh on the EUR in the long term. For JPY, while markets expect no immediate rate changes from the BoJ, Governor Ueda’s comments and potential hints of future rate hikes will influence its outlook.

EUR: Weak economy

The euro's outlook is currently bearish, shaped by recent ECB policy adjustments and unfavored domestic developments. In its September meeting, the ECB cut the deposit facility rate by 25 basis points to 3.50%, while also reducing the main refinancing rate to 3.65% and the marginal lending facility to 3.90%. This decision reflects the ECB’s data-dependent approach and aims to provide better control over market rates. Despite recent inflation data aligning with expectations, core inflation projections for 2024 and 2025 have been revised slightly upwards. Economic growth forecasts were also downgraded, with 2024 growth now expected at 0.8%. Bank analyses reinforce a bearish sentiment towards the euro.

Nomura anticipates broad EUR underperformance due to softening growth and the potential for a faster pace of ECB rate cuts, though they note that the September meeting might not have fully captured these dynamics. Credit Agricole also maintains a bearish stance, adjusting its EUR/USD forecast to reflect a more gradual USD recovery amid potential US political uncertainties. They expect the EUR to face downward pressure if the Fed cuts rates more aggressively or if global economic conditions deteriorate. Further insights from banks like Goldman Sachs and ING suggest a cautious approach.

Goldman Sachs expects the ECB to continue cutting rates, possibly to a terminal rate of 2% by mid-2025, though there is a risk of inflationary pressures forcing a future rate hike. ING predicts that weakening eurozone growth could trigger more aggressive rate cuts in the future.

JPY: On hold but remain hawkish

Recent developments suggest a predominantly bullish outlook for the JPY, driven by various supportive factors. The JPY’s strength has been bolstered by its role as a safe haven amid global uncertainties, coupled with widening rate differentials. Analysts and markets are increasingly confident in the JPY's potential for further gains, particularly given the BoJ forward guidance on future rate hikes in July meeting. The BoJ's intention to raise rates gradually into 2025 and its ongoing focus on inflation risks reinforce the bullish sentiment.

Further supporting the JPY is the expected reduction in the Fed’s rates, which could narrow the US-Japan interest rate spread and enhance the Yen's appeal. Comments from BoJ officials indicating readiness to adjust policy in response to economic conditions add to the positive outlook, signaling that the Yen may continue to outperform the USD in the near term. Additionally, recent observations on oil prices have also been favorable for the JPY. The impact of fluctuating oil prices has created a positive terms of trade shock for Japan, while the Yen has appreciated against the Euro due to favorable Japanese equity performance relative to Eurozone equities.

Looking ahead, market participants will focus on key upcoming events that could influence the JPY's trajectory. Japanese Core Nationwide CPI is expected to rise slightly to 2.8%, providing insights into inflation dynamics just before the BoJ’s next policy meeting. Although markets largely anticipate no immediate rate changes, the BoJ's stance on monetary policy and Governor Ueda’s commentary will be closely watched. The central bank is expected to maintain its current rate of 0.25% but remains open to future hikes if economic conditions and inflation align with its forecasts. This environment of cautious optimism and ongoing BoJ commentary will be pivotal in shaping the JPY’s near-term outlook.

EUR/JPY 4H Chart

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