EUR/JPY edges lower to near 156.20 during Friday’s Asian session, continuing to receive support from the Bank of Japan's (BoJ) hawkish signals. The BoJ has indicated that it may raise interest rates further if the economic outlook meets expectations.
Fitch Ratings' latest report on the Bank of Japan's policy outlook suggests that the BoJ might raise rates to 0.5% by the end of 2024, 0.75% in 2025, and 1.0% by the end of 2026. The BoJ is diverging from the global trend of policy easing, having raised rates more aggressively than anticipated in July. This move underscores its increasing confidence that reflation is now firmly established.
Read more: Fitch expects BoJ interest rate at 0.75% by 2025
On Thursday, hawkish BoJ policymaker Naoki Tamura stated that the central bank should raise interest rates to at least 1% as early as the second half of the next fiscal year. This comment reinforces the BoJ's commitment to ongoing monetary tightening. Tamura noted that the likelihood of Japan’s economy sustainably reaching the BoJ's 2% inflation target was improving, indicating that conditions for further rate hikes are becoming more favorable, according to Reuters.
The European Central Bank (ECB) reduced the Main Refinancing Operations Rate to 4.0% with a 25 basis-point cut on Thursday. Additionally, in an interview with Deutschlandfunk early Friday, ECB policymaker and Bundesbank President Joachim Nagel mentioned that "core inflation is also moving in the right direction." Nagel expects the inflation goal to be achieved at the end of next year.
Traders await the Eurozone's Industrial Production data scheduled for later today. The monthly figure is anticipated to decrease by 0.3% in July, following a previous 0.1% decline. Meanwhile, the annual data is expected to show a 2.7% decline, an improvement from the previous 3.9% drop.
Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%. If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.
Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.
Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank. If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.
The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure. Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.