EUR/JPY holds positive ground above 162.50 as traders await ECB rate decision this week
- EUR/JPY gains traction to near 162.55 in Tuesday’s early European session
- Expectations of further BoJ hikes and safe-haven flows could boost the JPY.
- Bets for a move of aggressive policy easing by the ECB might weigh on the shared currency.
The EUR/JPY cross trades in positive territory around 162.55 during the early European session on Tuesday. However, the potential upside of the cross might be limited amid concerns about US President Donald Trump's trade tariffs and rising speculation about further the Bank of Japan (BoJ) rate hike.
The BoJ raised interest rates on Friday by a quarter point to 0.5%, their highest since 2008, as widely expected. BOJ Governor Kazuo Ueda said the central bank will continue hiking if the outlook is realized, adding that there is scope to push up borrowing costs further before they reach levels deemed neutral to the economy. This, in turn, could provide some support to the Japanese Yen (JPY) against the shared currency. Markets were pricing in one more 25 basis points (bps) rate hike by the end of this year.
Meanwhile, the uncertainties with proposed tariffs from US President Donald Trump could trigger the fear of trade wars and elevate market volatility. This might lift a safe-haven currency like the JPY and create a headwind for EUR/JPY.
On the Euro front, the rising expectations for further rate cuts by the European Central Bank (ECB) on Thursday might undermine the Euro. The ECB is expected to cut its benchmark deposit rate by a further quarter point to 2.75% at its January meeting, its fourth reduction in a row. Analysts at Citi anticipate the ECB to reduce interest rates by a quarter of a percentage point at every meeting until at least the summer, citing weak growth and cooling inflation in the Eurozone.
Euro FAQs
The Euro is the currency for the 19 European Union countries that belong to the Eurozone. It is the second most heavily traded currency in the world behind the US Dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily turnover of over $2.2 trillion a day. EUR/USD is the most heavily traded currency pair in the world, accounting for an estimated 30% off all transactions, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy. The ECB’s primary mandate is to maintain price stability, which means either controlling inflation or stimulating growth. Its primary tool is the raising or lowering of interest rates. Relatively high interest rates – or the expectation of higher rates – will usually benefit the Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.
Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), is an important econometric for the Euro. If inflation rises more than expected, especially if above the ECB’s 2% target, it obliges the ECB to raise interest rates to bring it back under control. Relatively high interest rates compared to its counterparts will usually benefit the Euro, as it makes the region more attractive as a place for global investors to park their money.
Data releases gauge the health of the economy and can impact on the Euro. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the single currency. A strong economy is good for the Euro. Not only does it attract more foreign investment but it may encourage the ECB to put up interest rates, which will directly strengthen the Euro. Otherwise, if economic data is weak, the Euro is likely to fall. Economic data for the four largest economies in the euro area (Germany, France, Italy and Spain) are especially significant, as they account for 75% of the Eurozone’s economy.
Another significant data release for the Euro is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought after exports then its currency will gain in value purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.