Due to the Bank of Japan's apparent reluctance to accelerate the pace of policy tightening, the euro is poised to rise against the yen, with the extent of the gains remaining an open question. Bank of Japan Governor Kazuo Ueda reiterated on Monday plans to continue raising the benchmark interest rate, but this rhetoric has been repeated numerous times before. The BOJ is committed to nurturing the budding economic recovery, and inflation-adjusted interest rates are expected to remain deeply in negative territory, which will be unfavorable for the yen.
In the eurozone, although there is room for further policy easing based on the central bank's own expectations for the neutral rate, the market now believes the European Central Bank will not need to do so. The ECB's upward revisions to HICP and core inflation support traders' expectations that the bank will not implement further rate cuts, especially considering the improved regional growth prospects. Rising German government bond yields are also expected to support the euro, as the country's longer-dated bonds may continue to face pressure given this year's record issuance volume and increased fiscal spending. The euro/yen pair touched 185 yen last month before retreating nearly 1%, but it is likely to recoup these losses and set a new record high in the coming months.
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