- AUD/JPY gains as the JPY weakens ahead of the Bank of Japan’s monetary policy decision.
- The BoJ is expected to keep interest rates unchanged at 0.5% when its meeting concludes on Wednesday.
- The Australian Dollar strengthens on optimism surrounding China’s economic outlook.
AUD/JPY extends its winning streak for a third consecutive session, trading around 95.50 during early European hours on Tuesday. The currency cross appreciates as the Japanese Yen (JPY) faces pressure ahead of the Bank of Japan’s (BoJ) upcoming monetary policy decision.
The BoJ is widely expected to keep interest rates steady at 0.5% when its meeting concludes on Wednesday. However, expectations remain for a rate hike later this year, supported by rising wages and persistent inflation, paving the way for policy normalization.
Last week, major Japanese firms agreed to significant wage increases for the third straight year, aiming to support workers against inflation and address labor shortages. Higher wages are expected to boost consumer spending, drive inflation, and provide the BoJ with more flexibility for future rate hikes.
Meanwhile, the AUD/JPY cross gains support as the China-linked Australian Dollar (AUD) strengthens, while the safe-haven JPY weakens amid an improving economic outlook in China. Over the weekend, China introduced a special action plan to revive consumption, including measures to raise wages, boost household spending, and stabilize stock and real estate markets.
However, the upside for the AUD/JPY cross could be limited as the AUD faces headwinds from rising geopolitical tensions in the Middle East. The US reaffirmed its commitment to striking Yemen’s Houthis until they cease attacks on Red Sea shipping, adding to market uncertainty.
Additionally, Reserve Bank of Australia (RBA) Assistant Governor (Economic) Sarah Hunter stated late Monday that the central bank will take a cautious approach to rate cuts. The February statement indicated that the RBA board remains more conservative than market expectations regarding further easing. Hunter also emphasized the importance of monitoring US policy decisions and their impact on Australian inflation.
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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