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So far during the Asian session, EUR / JPY has remained unchanged within a narrow range of 145.04 to 145.20. The pair has been trending higher since the beginning of the year, primarily due to the fundamentals of the US Dollar, although the Yen has also played a role domestically.

Initially, Federal Reserve policy has dominated the conflict between the Euro and the US Dollar. The testimony of Fed chairman Jerome Powell this week will be closely monitored for any new indications as to whether the U.S. central bank could reaccelerate the pace of rate increases in response to recent data. The Fed has raised interest rates by 25 basis points at each of its last two meetings after delivering a series of 50bp hikes last year. Fed funds futures traders are pricing in a 76% chance that the Fed will raise rates by 25 basis points at its March 21-22 meeting, and a 24% chance of a 50 basis point increase, based on recent data surrounding these meetings.

In recent months, however, the EUR has faced its own fundamental challenges. "A build-up of EUR long positions late last year and into January reflected a decline in European gas prices and a strengthening in the view that Germany could avoid recession this year," analysts at Rabobank said. "Germany may still experience a technical recession in Q4 2022/Q1 2023, but more recent data indicate economic resilience. However, "resilient" is not the same as "powerful," and the market faces these data releases with longer EUR positions than at the end of last year. This suggests that the ECB's hawkish rhetoric may struggle to cajole the EUR substantially higher, particularly in light of the dollar's recent strength, analysts added.

The following BoJ policy meeting is scheduled for March 10, and it will be Kuroda's last. Markets anticipate that he will initiate policy normalization by adjusting YCC. "However, this is doubtful without the outcome of the spring wage negotiations," Rabobank analysts argued. "We believe the Bank of Japan will adopt a gradual and cautious approach to policy this year, with a loosening of YCC being the first step in any reduction in policy easing. On a 12-month horizon, we see potential for USD / JPY to reach 125.

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