EUR/JPY holds above 160.50, German HICP inflation rises to 2.6% in July
|- EUR/JPY trades firmer around 160.75 in Friday’s early European session.
- German HICP inflation rose in July to 2.6%, according to the Federal Statistics Office on Friday.
- Traders will evaluate Japan's monetary policy outlook about the interest rate path.
The EUR/JPY cross holds positive ground near 160.75 during the early European session on Friday. The recent German inflation report provides modest support to the Euro (EUR). However, safe-haven flows amid ongoing geopolitical tensions in the Middle East might lift the Japanese Yen (JPY) and cap the upside for the cross.
The German Harmonized Index of Consumer Prices (HICP) rose 2.6% year-on-year in July, Destatis reported on Friday. This figure was in line with the market expectation. Meanwhile, the HICP inflation remains unchanged at 0.5% MoM in July.
The European Central Bank (ECB) cut the interest rates from 4% to 3.75%, but there is still no firm path for easing policy further. ECB President Christine Lagarde said during the coast conference the question of any move in September is wide open.
On the other hand, the dovish comments from Bank of Japan (BoJ) Deputy Governor Shinichi Uchida on Wednesday weigh on the JPY. According to the JP Morgan Asset Management (JPAM), the Bank of Japan is unlikely to hike in the near term. Analysts said that the BoJ is more likely to occur in 2025 if the global economic environment continues steady. Additionally, Japan’s Finance Minister Shunichi Suzuki stated on Thursday that monetary policy decisions fall under the purview of the Bank of Japan, while they will continue watching market developments closely, as reported by Reuters.
Japanese Yen FAQs
The Japanese Yen (JPY) is one of the world’s most traded currencies. Its value is broadly determined by the performance of the Japanese economy, but more specifically by the Bank of Japan’s policy, the differential between Japanese and US bond yields, or risk sentiment among traders, among other factors.
One of the Bank of Japan’s mandates is currency control, so its moves are key for the Yen. The BoJ has directly intervened in currency markets sometimes, generally to lower the value of the Yen, although it refrains from doing it often due to political concerns of its main trading partners. The current BoJ ultra-loose monetary policy, based on massive stimulus to the economy, 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 stance of sticking to ultra-loose monetary policy has led to a widening policy divergence with other central banks, particularly with the US Federal Reserve. This supports a widening of the differential between the 10-year US and Japanese bonds, which favors the US Dollar against the Japanese Yen.
The Japanese Yen is often seen as a safe-haven investment. This means that in times of market stress, investors are more likely to put their money in the Japanese currency due to its supposed reliability and stability. Turbulent times are likely to strengthen the Yen’s value against other currencies seen as more risky to invest in.
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