- EUR/JPY depreciated after ECB President Christine Lagarde’s interview published by the Financial Times on Monday.
- ECB Lagarde stated that the central bank is nearing its goal of bringing inflation down to the 2% medium-term target.
- The recent Japan inflation report has increased the odds of a potential rate hike by the BoJ in January or March.
EUR/JPY extends its losses following an interview of European Central Bank (ECB) President Christine Lagarde published by the Financial Times on Monday. The EUR/JPY cross remains tepid around 163.00 during the European hours.
Christine Lagarde, President of the European Central Bank (ECB), emphasized that the central bank is nearing its goal of sustainably bringing inflation down to the medium-term target of 2%. However, Lagarde stressed the importance of continued vigilance, particularly concerning inflation in the services sector.
Earlier in December, Lagarde indicated that the ECB would consider further interest rate cuts if inflation showed continued progress toward the 2% target. She noted that aggressive measures to curb economic growth were no longer deemed necessary under such conditions. This shift suggests that the ECB is gradually moving toward a more accommodative monetary policy stance as inflationary pressures ease.
Additionally, ECB Governing Council member Boris Vujcic stated on Saturday that the central bank plans to continue lowering borrowing costs in 2025, according to Bloomberg. “The direction is clear—it’s a continuation of the path from 2024, with further reductions in interest rates,” he said.
In Japan, strong National Consumer Price Index (CPI) data released on Friday left the door open for a potential interest rate hike by the Bank of Japan (BoJ) in January or March. Inflation reached a three-month high of 2.9% year-over-year in November, up from 2.3% in October. Additionally, the annual core inflation rate rose to 2.7%, exceeding market expectations of 2.6%.
However, traders remain cautious about the BoJ's intentions to hike rates further following the central bank’s decision to keep its policy rate for the third consecutive meeting, keeping the short-term rate target within the range of 0.15%-0.25%, in line with market expectations. Traders are eagerly anticipating the release of the BoJ’s Meeting Minutes, scheduled for Tuesday.
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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