EUR/JPY dives to 168.50 on election risk, focus shifts to BoJ policy

• EUR/JPY tumbles to 168.50 as the Eurozone’s political uncertainty weakens the Euro’s appeal.
• French Macron called for a snap election after exit polls showed significant seats for Bardella-led Far-right.
• The BoJ may opt for reducing asset purchases as a step towards policy-normalization.

The EUR/JPY pair falls sharply to 168.50 in Monday’s New York session as political uncertainty in the Eurozone prompted by French President Emmanuel Macron’s decision of dissolving parliament and calling for a snap election weighed heavily on the Euro.

The decision came after exit polls for European parliamentary elections indicated that Marine Le Pen’s far-right National Rally (RN) scored 32%-33% seats under the leadership of the party’s president, Jordan Bardella, which was more than double from Macron’s centrist list. This has triggered upside risks to change in government, which spawns uncertainty over the continuation of current fiscal policies.

Meanwhile, the absence of support for subsequent interest-rate cuts by European Central Bank (ECB) policymakers has failed to offer some cushion to the weak Euro. In the European session, ECB policymaker and Slovakian central bank Governor Peter Kazimir also said that the central bank should not rush into another rate cut as progress in disinflation appears to be bumpy in the next few months.

ECB policymakers worry that wage growth will continue to remain firm, which could boost consumer spending and slow the progress in inflation declining to the bank’s target. Meanwhile, a weak Euro is also expected to spur inflationary pressures by making Eurozone exports competitive in the global market.

On the Tokyo front, investors await the Bank of Japan’s (BoJ) monetary policy decision, which will be announced on Friday. The BoJ is expected to leave interest rates at their current levels but reduce asset purchases to maintain progress towards policy normalization.

On the economic front, revised estimates of Japan’s Q1 Gross Domestic Product (GDP) showed that the economy contracts at a slower pace of 1.8% from preliminary estimates of 2.0% on an annualized basis.