- EUR/JPY gains traction to around 160.70 in Tuesday’s early European session, up 0.49% on the day.
- Ishiba’s comments undermine the Japanese Yen.
- ECB’s Lagarde said she is increasingly confident that inflation will ease to its 2% target.
The EUR/JPY cross extends the rally to near 160.70 during the early European session on Tuesday. The remarks from Japan's incoming Prime Minister (PM) Shigeru Ishiba weigh on the Japanese Yen (JPY). Investors await the Eurozone Harmonized Index of Consumer Prices (HICP) for September for fresh impetus. Also, the European Central Bank (ECB) policymakers Luis de Guindos and Isabel Schnabel are set to speak later on Tuesday.
The dovish comments from Japan's upcoming Prime Minister Shigeru Ishiba exert some selling pressure on the JPY. Ishiba said that the Bank of Japan's (BoJ) monetary policy must remain accommodative to underpin a fragile economic recovery.
Elsewhere, Japan’s Tankan Large Manufacturing Index showed that overall business conditions for large manufacturing companies remained steady in the third quarter (Q3) of 2024. The headline large Manufacturers' Sentiment Index arrived at 13.0 in Q3 from 13.0 in Q2, matching the expectations.
On the Euro front, the softer German CPI inflation data triggers the expectation for a 25 basis points (bps) rate cut at the next ECB policy meeting in October. This, in turn, might cap the upside for the shared currency. The ECB President Lagarde noted on Monday that the central bank is increasingly confident that inflation will fall to its 2% target and this will be reflected in its next policy move, hinting yet about a coming interest rate reduction. The markets raise their bets on a reduction in borrowing costs at the October meeting after Lagarde's speech.
ECB FAQs
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy for the region. The ECB primary mandate is to maintain price stability, which means keeping inflation at around 2%. Its primary tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger 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.
In extreme situations, the European Central Bank can enact a policy tool called Quantitative Easing. QE is the process by which the ECB prints Euros and uses them to buy assets – usually government or corporate bonds – from banks and other financial institutions. QE usually results in a weaker Euro. QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The ECB used it during the Great Financial Crisis in 2009-11, in 2015 when inflation remained stubbornly low, as well as during the covid pandemic.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the European Central Bank (ECB) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the ECB stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Euro.
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