EUR/JPY dives to multi-day low, closer to mid-161.00s amid notable JPY buying

EUR/JPY attracts sellers for the second straight day amid a goodish pickup in the JPY demand.
Geopolitical risks, along with bets for additional BoJ rate hike in 2024, lend support to the JPY.
The ECB’s dovish outlook contributes to the Euro’s underperformance and the ongoing decline.

The EUR/JPY cross turns lower for the second straight day following an Asian session uptick to the 163.20 area and moves away from over a two-week high, around the 163.85-163.90 region touched on Friday. Spot prices drop to a multi-day low, closer to mid-161.00s in the last hour and seem vulnerable to slide further amid a strong pickup in demand for the Japanese Yen (JPY).

Investors remain concerned about the risk of a further escalation of geopolitical tensions in the Middle East, which drives some haven flows towards the JPY and exerts downward pressure on the EUR/JPY cross. The market worries resurfaced after Hamas published an official statement rejecting the terms for a hostage release-ceasefire deal discussed in Doha last week. This, along with hawkish Bank of Japan (BoJ) expectations, underpins the JPY.

Japan’s second-quarter Gross Domestic Product (GDP) print released on Thursday surpassed consensus estimates on a quarterly as well as an annualized basis. Adding to this, data published this Monday showed that Machinery Orders in June surpassed consensus estimates and rose by 2.1% in June 2024. This signaled an improving demand and macroeconomic environment, which should encourage the BoJ to raise interest rates again later this year.

In contrast, the markets have been pricing in the possibility that the European Central Bank (ECB) will cut rates again in the wake of declining inflation in the Eurozone and downbeat economic outlook. This, in turn, contributes to the shared currency's relative underperformance against its Japanese counterpart and exerts additional pressure on the EUR/JPY cross, though a positive risk tone might cap the JPY and help limit any further losses.

The market attention now shifts to the release of the flash Eurozone PMIs on Thursday, which should provide fresh insight into the region's economic health and drive the Euro. In the meantime, the JPY price dynamics will continue to play a key role in influencing the EUR/JPY cross in the absence of any relevant market-moving economic data due for release on Monday.

Bank of Japan FAQs

What is the Bank of Japan?

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%.

What has been the Bank of Japan’s policy?

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.

How do Bank of Japan’s decisions influence the Japanese Yen?

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.

Is the Bank of Japan’s ultra-loose policy likely to change soon?

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. With wage inflation becoming a cause of concern, the BoJ looks to move away from ultra loose policy, while trying to avoid slowing the activity too much.

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