EUR/JPY hover right below yearly highs at 173.25 supported by ECB’s hawkishness
- The Euro reversed earlier losses on Thursday as ECB's Lagarde hinted at a larger rate cut pause.
- EUR/JPY's rally is giving signs of exhaustion, but Yen weakness keeps downside attempts limited.
- Risk appetite and political uncertainty in Japan are we¡ighing on the Japanese Yen.
The Euro downside attempts found buyers at the 172.50 area earlier on Friday, which sent the pair back to the 172.90 area, at a short distance to the one-year highs of 173.25.
The pair is on track for a nine-week rally, which is starting to give signs of exhaustion. The large wicks off the daily chart’s candles highlight a hesitating market, and the bearish divergence in the 4-hour chart points in the same direction, but the hawkish remarks by ECB President Lagarde after Thursday’s meeting are keeping ears in check for now.
EUR/JPY 4-Hour Chart
On Thursday, the European Central Bank left rates unchanged as widely expected. Beyond that, the optimistic growth outlook reflected in Lagarde’s comments prompted investors to temper their hopes for further monetary easing this year. The Euro appreciated across the board following the event.
Risk appetite and Political uncertainty are weighing on the Yen
The Japanese Yen, on the other hand, is struggling due to a mix of moderate risk appetite, boosted by deals from the US and some of its main trading partners, and growing political uncertainty in Japan.
The Bank of Japan is in a challenging position. Tokyo CPI data revealed a slight decline in inflation, but the political uncertainty, amid Prime Minister Ishiba’s weakness after the defeat in last weekend’s elections, hinders further monetary policy decisions.
Against this background, investors are dialing down hopes of further rate hikes in the near-term, and this is likely to act as an additional headwind for the Yen.
Central banks FAQs
Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.
A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.
A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.
Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.
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