EUR/JPY flat lines above 172.00 mark; bullish potential seem intact

Source Fxstreet
  • EUR/JPY continues to lack significant momentum for a second day on Tuesday.
  • The BoJ rate hike uncertainty and hopes for a Russia-Ukraine peace deal undermine the JPY.
  • Reduced bets for an immediate ECB rate cut also offer support to the Euro and spot prices.

The EUR/JPY cross extends its sideways consolidative price move for the second straight day and remains confined in a narrow band, above the 172.00 mark through the Asian session on Tuesday.

The recent trade deal between the US and the European Union (EU) eased market concerns about the deflationary impact of tariffs. The stable economic outlook fueled speculations that the European Central Bank (ECB) will keep interest rates steady at least until December, which continues to offer support to the shared currency and the EUR/JPY cross.

The Japanese Yen (JPY), on the other hand, continues with its relative underperformance in the wake of the uncertainty over the likely timing of the next interest rate hike by the Bank of Japan (BoJ). Apart from this, hopes for a deal to end the protracted Russia-Ukraine war contribute to the safe-haven JPY's underperformance and act as a tailwind for the EUR/JPY cross.

Meanwhile, the BoJ upwardly revised its inflation forecast at the end of the July meeting and left the door open for an imminent interest rate hike by the end of this year. This is holding back the JPY from placing aggressive bets and capping the EUR/JPY cross, making it prudent to wait for strong follow-through buying before positioning for additional gains.

Traders now look forward to ECB President Christine Lagarde's speech on Wednesday for some impetus, though the focus will remain glued to the release of the flash PMI prints on Thursday. In the meantime, the fundamental backdrop suggests that the EUR/JPY cross is likely to extend the range play in the absence of any relevant macro data on Tuesday.

Euro FAQs

The Euro is the currency for the 19 European Union countries that belong to the Eurozone. It is the second most heavily traded currency in the world behind the US Dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily turnover of over $2.2 trillion a day. EUR/USD is the most heavily traded currency pair in the world, accounting for an estimated 30% off all transactions, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).

The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy. The ECB’s primary mandate is to maintain price stability, which means either controlling inflation or stimulating growth. Its primary tool is the raising or lowering of interest rates. Relatively high interest rates – or the expectation of higher rates – will usually benefit the Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.

Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), is an important econometric for the Euro. If inflation rises more than expected, especially if above the ECB’s 2% target, it obliges the ECB to raise interest rates to bring it back under control. Relatively high interest rates compared to its counterparts will usually benefit the Euro, as it makes the region more attractive as a place for global investors to park their money.

Data releases gauge the health of the economy and can impact on the Euro. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the single currency. A strong economy is good for the Euro. Not only does it attract more foreign investment but it may encourage the ECB to put up interest rates, which will directly strengthen the Euro. Otherwise, if economic data is weak, the Euro is likely to fall. Economic data for the four largest economies in the euro area (Germany, France, Italy and Spain) are especially significant, as they account for 75% of the Eurozone’s economy.

Another significant data release for the Euro is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought after exports then its currency will gain in value purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.

Disclaimer: For information purposes only. Past performance is not indicative of future results.
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