The EUR/JPY cross snaps a three-day winning streak during the early European session on Thursday. The ongoing geopolitical tension in the Red Sea benefits safe-haven assets like the Japanese Yen (JPY) and weighs on the cross. However, the downside of EUR/JPY might be capped as the market anticipates that the Bank of Japan (BoJ) is unlikely to shift from its ultra-dovish stance. The cross currently trades around 161.20, down 0.03% on the day.

The European Central Bank (ECB) Governing Council member Bostjan Vasle said it’s too early to expect the first rate cuts at the beginning of the second quarter. He further stated that inflation in the Euro area is still too high and must be headed back to the 2% target before the central bank changes the course of monetary policy.

On the other hand, the JPY was undermined by investors' anticipation that the BoJ would maintain its ultra-dovish stance at its January policy meeting next week. The Japanese central bank's former executive Eiji Maeda said on Wednesday that the BoJ may end negative interest rates in April but will likely go slow in any further steps towards normalising ultra-loose monetary policy, unlike the aggressive monetary tightening taken by the ECB.

Additionally, the escalating tension in the Middle East might cap the downside of the JPY. Late Wednesday, Yemen’s Houthi rebels targeted a US-owned cargo ship with a kamikaze drone in the Red Sea after the Biden administration said it will re-designate the Houthis to its list of global terrorists.

Market participants will monitor the ECB Monetary Policy Meeting Accounts and ECB President Lagarde's speech on Thursday. On Friday, the December German Producer Price Index (PPI) will be released. The attention will shift to the BoJ Interest Rate Decision next week. This event could trigger volatility in the market and give a clear direction to the EUR/JPY cross.

EUR/JPY

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