The EUR/JPY is trading around 145.20 as investors wait for Fed and BoJ announcements

The EUR/JPY exchange rate has stayed unchanged so far during the Asian session within a constrained band of 145.04 to 145.20. Since the beginning of the year, the pair has been trending higher, mainly as a result of the US Dollar's fundamentals, though the Yen has also contributed locally.

Initially, Federal Reserve policy has ruled the dispute between the Euro and the US Dollar. The testimony of Fed chairman Jerome Powell this week will be carefully watched for any new indications as to whether the U.S. central bank could reaccelerate the pace of rate rises in reaction to recent statistics. The Fed has increased interest rates by 25 basis points at each of its last two meetings after giving a run of 50bp hikes last year. Based on recent information regarding these meetings, dealers of Fed funds futures are pricing in a 76% chance that the Fed will increase rates by 25 basis points at its meeting on March 21–22 and a 24% chance of a 50 basis point increase.

In recent months, however, the EUR has confronted its own basic challenges. "A build-up of EUR long positions late last year and into January mirrored a drop in European gas costs and a strengthening in the view that Germany could escape recession this year," analysts at Rabobank said. "Germany may still go through a technical slowdown in Q4 2022/Q1 2023, but more recent statistics show that the economy is resilient. Although "resilient" does not necessarily equate to "powerful," the market is more prepared for these data dumps than it was at the end of last year by holding longer EUR holdings. This indicates that the ECB's hawkish language may find it difficult to coax the EUR significantly higher, experts said, especially in light of the dollar's recent resilience.

The upcoming BoJ policy meeting is planned for March 10, and it will be Kuroda's last. Markets expect that he will modify YCC to start the policy normalization process. "However, this is dubious without the result of the spring wage talks," Rabobank analysts observed. "We anticipate that the Bank of Japan will implement policy cautiously and gradually this year, with a reduction in YCC being the first move in any decrease in easing. On a 12-month horizon, we see possibility for USD / JPY to hit 125.