EUR/JPY attracts some sellers below 170.50 amid BoJ rate hike hopes
- EUR/JPY trades on a softer note around 170.25 in Monday’s early European session, down 0.67% on the day.
- The growing speculation of a BoJ rate hike might support the JPY.
- The ECB's cautious stance might cap the cross’s downside.
The EUR/JPY cross faces some selling pressure near 170.25 during the early European trading hours on Monday. The higher chance that the Bank of Japan (BOJ) will hike at its July monetary policy meeting provides some support to the Japanese Yen (JPY). Traders will take more cues from the preliminary Eurozone July Purchasing Managers’ Index (PMI) on Wednesday, followed by the Japanese Tokyo Consumer Price Index (CPI) on Friday.
Japan's core inflation rose for a second straight month in June, fueling market expectations of a near-term interest rate hike by the Japanese central bank. BoJ Governor Kazuo Uedastated that the central bank will push up rates further if rising wages and service prices heighten prospects for durably achieving its 2% inflation target. Nonetheless, more than three-quarters of economists polled by Reuters anticipated the Bank of Japan (BOJ) to keep rates on hold this month due to lacklustre consumption and a fragile economy.
Additionally, the Japan Times reported that hedge funds pared bets against the JPY after a suspected double market intervention from Japanese authorities to bolster the currency. The fear of possible further foreign exchange (FX) intervention from Japanese officials is likely to boost the JPY in the near term.
On the other hand, the European Central Bank's (ECB) cautious approach to interest rates might cap the downside of the Euro (EUR). The ECB emphasized the data-dependent approach, leaving the timing of rate cuts uncertain. The ECB's cautious stance highlighted geopolitical risks and political uncertainties, which must be watchful and adaptive.
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 current BoJ ultra-loose monetary policy, based on massive stimulus to the economy, has caused the Yen to depreciate against its main currency peers. This process has exacerbated more recently due to an increasing policy divergence between the Bank of Japan and other main central banks, which have opted to increase interest rates sharply to fight decades-high levels of inflation.
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 supports a widening of the differential between the 10-year US and Japanese bonds, which favors the US Dollar against the Japanese Yen.
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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