EUR/JPY slumps below 171.50 as Bessent criticizes BoJ, Eurozone GDP eyed
- EUR/JPY falls after US Treasury Secretary Scott Bessent criticized the Bank of Japan’s approach to inflation.
- The BoJ is expected to drop its reliance on an inflation gauge tied to domestic demand and wages.
- Traders await Eurozone Industrial Production and Q2 Gross Domestic Product data on Thursday.
EUR/JPY depreciates more than 0.5%, trading around 171.50 during the Asian hours on Thursday. The currency cross loses ground as the Japanese Yen (JPY) advances after US Treasury Secretary Scott Bessent criticized the Bank of Japan’s (BoJ) stance on inflation. Bessent said that the BoJ is “behind the curve” and needs to hike rates to get price pressures under control. He noted that he will address the issue directly with BoJ Governor Kazuo Ueda.
Japan’s central bank is expected to abandon its reliance on an inflation gauge linked to domestic demand and wages, which has so far restrained further tightening. Governor Kazuo Ueda has defended a cautious stance, noting that “underlying inflation” remains below the BoJ’s 2% target. However, some board members are pushing to emphasize headline inflation, which stood at 3.3% in June.
However, the EUR/JPY cross gained ground as the Euro (EUR) appreciated, driven by the prevailing anticipation that the European Central Bank (ECB) had ended its easing cycle in July after eight cuts over the past year, leaving borrowing costs at their lowest since November 2022. However, traders still expect another cut before year-end.
The Euro also receives support from the potential for the interest rate differential between the Fed and the ECB. Traders await Eurozone Industrial Production and Gross Domestic Product (GDP) data for the second quarter due later in the day.
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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