EUR/JPY steadies around 169.50, with upside potential due to BoJ’s caution on rate hikes
- EUR/JPY may appreciate as the BoJ adopts caution on unwinding its ultra-loose policy.
- BoJ Governor Ueda highlighted that future rate hikes will be data-driven.
- ECB policymaker Pierre Wunsch said, “I am not uncomfortable with the market's interest rate expectations.”
EUR/JPY remains steady following recent gains registered in the previous session, trading around 169.50 during the Asian hours on Thursday. The currency cross may regain its ground as the Japanese Yen (JPY) may face challenges due to the Bank of Japan’s (BoJ) caution on unwinding its ultra-loose policy, forcing investors to delay their expectations for early interest rate hikes. The Bank of Japan's (BoJ) new board member, Kazuyuki Masu, highlighted on Tuesday that the central bank should not rush into raising interest rates given various economic risks.
Moreover, BoJ Governor Kazuo Ueda said that any rate hikes in the future will be data-driven, including wage growth and expectations. Ueda mentioned that headline inflation has remained above 2% for nearly three years, and underlying inflation remains below target.
The Japanese Yen struggled as the US President Donald Trump said on Tuesday that he is considering adding additional 30% or 35% tariffs on Japan and not extending the self-imposed July 9 deadline on the currently-suspended reciprocal tariffs. Trump expressed his doubt about reaching a deal with Japan.
Traders are closely watching the European Central Bank (ECB) forum for signals on the central bank’s policy outlook for the remainder of the year. Latest remarks from several ECB officials highlighted increasing concern over the Euro's (EUR) strength and its potential dampening effect on inflation.
ECB policymaker Pierre Wunsch said on Wednesday that “I am not uncomfortable with the market's interest rate expectations.” “There is an argument for providing a mildly supportive policy stance,” Wunsch added. Meanwhile, ECB member Olli Rehn said, “ECB should be mindful of the risk that inflation stays persistently below 2% target.” Rehn noted that the “joint European borrowing to finance defence could bolster the Euro's role by creating a new safe asset.”
Interest rates FAQs
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.
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