EUR/JPY weakens near 166.50 ahead of Eurozone GDP, German CPI data
|- EUR/JPY trades on a weaker note near 166.55 in Monday’s early European session, down 0.26% on the day.
- The Japanese Yen’s recent rally is supported by expectations of the BOJ rate hike on Wednesday.
- Investors will monitor the key Eurozone/German economic data on Tuesday ahead of the BoJ rate decision.
The EUR/JPY cross remains on the defensive around 166.55 during the early European trading hours on Monday. The Japanese Yen (JPY) extends a rally as traders raise their bets on the prospect of a rate hike by the Bank of Japan (BoJ) on Wednesday.
Market players await the BoJ monetary policy meeting on Wednesday for fresh catalysts. The growing speculation that a BoJ would raise interest rates and significantly reduce its monthly bond purchases continue to underpin the JPY against the Euro (EUR). Additionally, traders could potentially unwind their carry trades ahead of the BoJ's rate decision, which might lift the JPY.
Elsewhere, the escalating geopolitical risks in the Middle East might boost the safe-haven flows, benefiting the JPY. The Golan Heights attack on Saturday raised worries about a war between Israel and Hezbollah. Israel accuses Hezbollah of carrying out the strike on a football pitch, which killed at least 12 people, including children, and it has promised to react. However, Hezbollah denies being involved in the attack, according to the BBC on Sunday.
On the other hand, investors anticipate the European Central Bank (ECB) rate cuts in the near term, which exerts some selling pressure on the shared currency. ECB President Christine Lagarde indicated that additional data is necessary to confirm the ongoing disinflationary trend and to gain the ECB's confidence. The key Eurozone economic data this week might offer some hints on the path of interest rates this year.
The preliminary Gross Domestic Product (GDP) for the second quarter (Q2) from Germany and the Eurozone will be released on Wednesday, along with the German Consumer Price Index (CPI) for July. Any signs of stronger economic growth or sticky inflation could lift the Euro and cap the downside for the cross in the near term.
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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