EUR/JPY posts modest gains near 172.50 ahead of ECB rate decision
- EUR/JPY trades with mild gains around 172.50 in Thursday’s Asian session.
- Political uncertainty in Japan weighs on the Japanese Yen and acts as a tailwind for the cross.
- ECB is anticipated to hold rates again at its September meeting on Thursday.
The EUR/JPY cross posts modest gains near 172.50, snapping the four-day losing streak during the Asian trading hours on Thursday. Expectations that political uncertainty in Japan could give the Bank of Japan (BoJ) more reasons to delay interest rate hikes weigh on the Japanese Yen (JPY). Traders await the European Central Bank (ECB) interest rate decision later on Thursday, with no change in rates expected.
Japanese Prime Minister Shigeru Ishiba announced over the weekend that he will resign. The appointment of a new Japanese Prime Minister next month could offer the BoJ extra room to delay its next interest rate hike, especially if the next leader is concerned about borrowing prices rising too rapidly. Uncertainty around who becomes Prime Minister and what their policies might be could undermine the JPY and create a tailwind for the cross.
On the Euro front, the ECB is set to leave interest rates unchanged at its September meeting on Thursday as inflation remains in line with the target. Analysts expect the ECB to take up a “wait-and-see” approach and cut rates in December. The attention will shift to the ECB Press Conference following the policy decision.
ECB President Christine Lagarde's hawkish remarks in July reduced expectations of further reduction this month. Lagarde is unlikely to close the door on further rate cuts, especially since inflation is forecast to drop below the ECB's 2% target next year. However, any surprise dovish comments from ECB officials could drag the shared currency lower in the near term.
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.
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