EUR/JPY gains traction above 163.50 amid risk-on sentiment
- EUR/JPY edges higher to around 163.80 in Wednesday’s early European session, adding 0.10% on the day.
- BoJ's Ueda said he won’t push for higher interest rates unless the economy is strong enough to take it.
- Eurozone inflation declines below the target, supporting rate cut bets.
The EUR/JPY cross gains ground to near 163.80 during the early European session on Wednesday. The Japanese Yen (JPY) weakens against the Euro (EUR) due to the cautious remarks from the Bank of Japan (BoJ) Governor Kazuo Ueda and the improved risk sentiment. The European Central Bank (ECB) interest rate decision will be in the spotlight on Thursday.
BoJ Governor Kazuo said on Tuesday that uncertainties over overseas trade policies and economic and price situations remain extremely high, adding that there is no preset plan for rate hikes and that he won't push for higher interest rates unless the economy is strong enough to take it.
The cautious remarks fueled the expectation that the next interest rate hike won't come soon, weighing on the JPY. According to a Reuters poll, most economists expect the BoJ to hold rates steady through September, with a small majority forecasting a hike by year-end.
On the other hand, the Eurozone inflation eased below the ECB’s target in May. Data released by Eurostat on Tuesday showed that the Harmonized Index of Consumer Prices (HICP) inflation eased to 1.9% YoY in May from 2.2% in April. This figure came in softer than the 2.0% expected. Meanwhile, core HICP inflation declined to 2.3% YoY in May from 2.8% in the previous reading, below the consensus of 2.5%.
This report has triggered expectations for further ECB policy easing and might drag the shared currency lower against the JPY. Markets have fully priced in a 25 basis points (bps) reduction to the ECB’s deposit facility rate on Thursday. The cut would bring the deposit facility rate to 2.0%, its lowest level since January 2023.
Japanese Yen FAQs
The Japanese Yen (JPY) is one of the world’s most traded currencies. Its value is broadly determined by the performance of the Japanese economy, but more specifically by the Bank of Japan’s policy, the differential between Japanese and US bond yields, or risk sentiment among traders, among other factors.
One of the Bank of Japan’s mandates is currency control, so its moves are key for the Yen. The BoJ has directly intervened in currency markets sometimes, generally to lower the value of the Yen, although it refrains from doing it often due to political concerns of its main trading partners. The BoJ ultra-loose monetary policy between 2013 and 2024 caused the Yen to depreciate against its main currency peers due to an increasing policy divergence between the Bank of Japan and other main central banks. More recently, the gradually unwinding of this ultra-loose policy has given some support to the Yen.
Over the last decade, the BoJ’s stance of sticking to ultra-loose monetary policy has led to a widening policy divergence with other central banks, particularly with the US Federal Reserve. This supported a widening of the differential between the 10-year US and Japanese bonds, which favored the US Dollar against the Japanese Yen. The BoJ decision in 2024 to gradually abandon the ultra-loose policy, coupled with interest-rate cuts in other major central banks, is narrowing this differential.
The Japanese Yen is often seen as a safe-haven investment. This means that in times of market stress, investors are more likely to put their money in the Japanese currency due to its supposed reliability and stability. Turbulent times are likely to strengthen the Yen’s value against other currencies seen as more risky to invest in.
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