EURJPYnterest Rate Differential
European Central Bank (ECB):
Deposit rate: 2.25% (cut by 25 bps in April 2025).
Outlook: Markets expect two more cuts in 2025, potentially lowering rates to 1.75% by year-end, as tariff risks and weak growth persist.
Bank of Japan (BoJ):
Policy rate: 0.50% (held steady in May).
Outlook: BoJ lowered its 2025 GDP growth forecast to 0.5% (from 1.0%) due to U.S. tariff risks and weak Q1 data. Rate hikes are unlikely until 2026.
Differential: ~1.75% in favor of EUR, though ECB easing may narrow this gap.
Key Economic Data for May 2025
Eurozone
Q1 GDP Growth (Final):
0.3% QoQ (vs. preliminary 0.4%), marking the fifth straight quarter of growth.
Germany (+0.2%), Spain (+0.6%), and Italy (+0.3%) outperformed France (+0.1%).
Risks: U.S. tariffs on EU exports (potentially 20% starting July) threaten future growth.
ECB Policy Signals:
ECB President Lagarde emphasized a data-dependent approach, with further cuts likely if inflation remains subdued.
Japan
Q1 GDP Contraction:
-0.7% annualized (vs. -0.2% expected), driven by weak exports (-5.0%) and stagnant consumption.
U.S. tariffs on Japanese autos (24%) and machinery exacerbate recession risks.
BoJ Caution:
Governor Ueda warned of "downside risks" from trade tensions, signaling no near-term rate hikes despite inflation above target.
Directional Bias for EUR/JPY
Short-Term (May–June 2025): Bullish EUR/JPY
ECB’s higher rates (vs. BoJ’s 0.50%) sustain the euro’s yield advantage.
Japan’s weak GDP and tariff vulnerabilities keep JPY under pressure.
Medium-Term (H2 2025): Neutral-to-Bearish
ECB rate cuts (to 1.75%) could narrow the rate differential, reducing EUR appeal.
Safe-haven JPY demand may rise if U.S.-EU/Japan tariff tensions escalate.
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