EUR/JPY bounces back strongly as ECB signals pause in current policy-easing cycle

• EUR/JPY claws back early losses and turns higher to near 166.60 as the Euro outperforms.
• ECB officials have signaled that the monetary-easing cycle has come to an end.
• The safe-haven demand for the Euro has increased, being a liquid alternative to the US Dollar.

The EUR/JPY pair revisits the seven-month high near 166.60 during European trading hours on Thursday after recovering initial losses. The pair strengthens as the Euro (EUR) outperforms across the board after European Central Bank (ECB) officials signaled that the central bank could announce a pause in the current monetary policy expansion cycle.

ECB board member Isabel Schnabel said in Brussels during European trading hours, "This monetary-policy cycle is coming to an end as medium-term inflation is stabilizing around target," Bloomberg reported. Schnabel said that she expects inflation to be around 1.9% both in 2026 and 2027 and quoted it as "right at target". She signaled that the growth outlook is stable despite trade war risk.

Last week, ECB policymaker and Governor of the Bank of Estonia Madis Muller also signaled that the monetary expansion cycle is in the endgame. Muller said that he is comfortable with ECB President Christine Lagarde's comments, indicating that the "policy-easing cycle is almost finished". These comments from Lagarde came in her press conference last week after the ECB reduced interest rates by 25 basis points (bps) to 2% for the seventh time in a row.

Another reason behind the strength in the Euro is an increase in its safe-haven demand, being the liquid alternative to the US Dollar (USD). The safe-haven appeal of the US Dollar has diminished significantly amid uncertainty surrounding the United States' (US) tariff policy.

Although investors have underpinned the Euro against the Japanese Yen (JPY), the latter outperforms its other peers amid expectations that the Bank of Japan (BoJ) will raise interest rates again this year.

This week, BoJ Governor Kazuo Ueda kept the door open for further monetary policy tightening if officials get convinced that the underlying inflation moves around 2%.

For fresh cues on the interest rate outlook, investors await the BoJ's monetary policy announcement on Tuesday. In the meeting, the central bank is expected to keep interest rates steady at 0.5%.