EUR/JPY dives to over one-month low amid BoJ rate-hike bets, Eurozone PMIs in focus
|- EUR/JPY turns lower for the third straight day and drops to over a one-month low on Wednesday.
- The recent suspected intervention, along with BoJ rate-hike bets continue to underpin the JPY.
- A softer risk tone further benefits the safe-haven JPY and exerts pressure ahead of global PMIs.
The EUR/JPY cross attracts fresh sellers following an early uptick to the 169.20 region during the Asian session and turns lower for the third successive day on Wednesday. The downward trajectory drags spot prices to the lowest level since June 17, around the 168.35-168.30 area in the last hour, and is sponsored by the emergence of fresh buying around the Japanese Yen (JPY).
Against the backdrop of a suspected intervention by Japanese authorities, bets that the Bank of Japan (BoJ) could hike rates again at its upcoming policy meeting continue to underpin the JPY. The expectations were lifted by the overnight comments by Japan's ruling Liberal Democratic Party official Toshimitsu Motegi, saying that the BoJ should clearly indicate its resolve to normalise monetary policy, including through steady interest rate hikes.
Furthermore, a slight deterioration in the global risk sentiment – as depicted by a weaker tone across the global equity markets – benefits the safe-haven JPY and exerts additional pressure on the EUR/JPY cross. The shared currency, on the other hand, is weighed down by the European Central Bank's (ECB) downbeat view of the Eurozone's economic prospects and softer inflation expectations, which keeps a September rate cut move on the table.
This, along with the overnight sustained breakdown through the 170.00 psychological mark favors bearish traders and suggests that the path of least resistance for the EUR/JPY cross is to the downside. Hence, a subsequent fall below the 168.00 round figure, towards the 100-day Simple Moving Average (SMA) support near the 167.80 region en route to the mid-167.00s, or the June monthly swing low, looks like a distinct possibility.
On the economic data front, the au Jibun Bank flash PMI showed that Japanese manufacturing activity unexpectedly shrank in July. However, the disappointment was largely offset by strength in the services sector and did little to provide any meaningful impetus to the EUR/JPY Cross. Moving ahead, market participants now look forward to the flash Eurozone PMIs for short-term trading opportunities.
Bank of Japan FAQs
The Bank of Japan (BoJ) is the Japanese central bank, which sets monetary policy in the country. Its mandate is to issue banknotes and carry out currency and monetary control to ensure price stability, which means an inflation target of around 2%.
The Bank of Japan has embarked in an ultra-loose monetary policy since 2013 in order to stimulate the economy and fuel inflation amid a low-inflationary environment. The bank’s policy is based on Quantitative and Qualitative Easing (QQE), or printing notes to buy assets such as government or corporate bonds to provide liquidity. In 2016, the bank doubled down on its strategy and further loosened policy by first introducing negative interest rates and then directly controlling the yield of its 10-year government bonds.
The Bank’s massive stimulus has caused the Yen to depreciate against its main currency peers. This process has exacerbated more recently due to an increasing policy divergence between the Bank of Japan and other main central banks, which have opted to increase interest rates sharply to fight decades-high levels of inflation. The BoJ’s policy of holding down rates has led to a widening differential with other currencies, dragging down the value of the Yen.
A weaker Yen and the spike in global energy prices have led to an increase in Japanese inflation, which has exceeded the BoJ’s 2% target. Still, the Bank judges that the sustainable and stable achievement of the 2% target has not yet come in sight, so any sudden change in the current policy looks unlikely.
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