EUR/JPY extends recovery above 140.80 ahead of ECB-BOJ policy

• EUR/JPY has extended recovery near 141.00 on expectations of ECB-BOJ policy divergence.
• The ECB may accelerate its interest rates by 25 bps initially to test the waters.
• BOJ’s Kuroda may withstand policy easing to keep the inflation rate above 2%.

The EUR/JPY pair is mostly trading sideways above 140.00 as investors are awaiting the release of the interest rate policy by the European Central Bank (ECB) and Bank of Japan (BOJ) on Thursday. Both G7 participants have not paddled up their interest rates like the other mates which have accelerated their interest rates to tame the price pressures vigorously.

However, this time a policy divergence looks imminent as the market participants are betting over a rate hike announcement by ECB President Christine Lagarde. It would be worth watching whether the ECB will initially test the waters by hiking interest rates by 25 basis points (bps) or will choose the new normal of 50 bps.

Taking into account the soaring price pressures and the conclusion of the Asset Purchase Program (APP), the ECB is left with no other choice than to feature a rate hike. The final print of the Eurozone Harmonized Index of Consumer Prices (HICP) landed at 8.6%, which indicates that the households are facing the heat of price rise beyond their tolerance power.

On the Tokyo front, the BOJ is expected to stand with its ultra-loose monetary policy despite the vulnerable yen in the FX domain. BOJ Governor Haruhiko Kuroda is bound to accelerate policy easing as their main agenda is to keep the ongoing inflation rate above the desired rate. In order to keep price pressures above 2%, the Japanese economy is needed a higher wage rate to keep the former elevated.