EUR/JPY declines to two-week low on BoJ tightening signals, ECB pause

• The Euro continues to fall against the Japanese Yen, hitting a two-week low.
• Hawkish comments from the Bank of Japan boost expectations of further monetary tightening.
• In the Eurozone, inflation accelerates slightly, reinforcing the view of a prolonged pause from the ECB.

EUR/JPY slides 0.25% on Friday, trading around 175.40 at the time of writing, after hitting a two-week low of 174.82 earlier in the day. The Japanese Yen (JPY) is appreciating across the board, supported by remarks from Bank of Japan (BoJ) officials suggesting further policy tightening.

BoJ Deputy Governor Shinichi Uchida said on Friday that the Japanese economy is recovering moderately and that the central bank could tighten policy further if its economic outlook is met. These comments echo those from BoJ Governor Kazuo Ueda, who stated on Thursday in Washington that the central bank "will adjust the degree of monetary easing if our confidence in the outlook increases." These statements have strengthened market expectations of a BoJ rate hike before the end of the year, widening the policy divergence with other major central banks.

On the political front, uncertainty remains in Japan. According to Commerzbank, the reshuffling of alliances around new Liberal Democratic Party leader Sanae Takaichi could create a period of instability, limiting bold reforms but fostering greater exchange rate stability for the Japanese Yen.

OCBC, for its part, notes that markets are watching the possible formation of a parliamentary coalition ahead of the October 21 vote, which could influence the country's fiscal and monetary trajectory.

In Europe, French Prime Minister Sébastien Lecornu survived two no-confidence votes on Thursday, temporarily easing concerns over the country's political stability. Data released on Friday confirmed that the Harmonized Index of Consumer Prices (HICP) rose 2.2% YoY in September in the Eurozone, while core inflation climbed to 2.4%, the highest level since April.

These figures support recent remarks from several European Central Bank (ECB) policymakers, who suggested that the ECB is likely at or near the end of its rate-cutting cycle.

As the monetary policy divergence between the BoJ and the ECB widens, the Japanese Yen remains supported, to the detriment of the Euro.