- EUR/JPY gains momentum around 173.80 in Wednesday’s European session, up 0.20% on the day.
- Japanese business activity turned contractionary in June, pressuring the JPY.
- The interest rate differential between the Eurozone and Japan continues to support the Euro for the time being.
The EUR/JPY cross trades in positive territory for the sixth consecutive day near 173.80 on Wednesday during the early European session. The Japanese Yen (JPY) weakens after the data showed that Japanese business activity turned contractionary in June.
The final reading of Japan’s Services PMI fell to 49.4 in June from 49.8 in May. This figure registered the largest downward movement since January 2022 and among the biggest on record, which exerts some selling pressure on the JPY and acts as a headwind for the pair. On the other hand, the possibility that the Bank of Japan (BoJ) will intervene in the foreign exchange (FX) could underpin the JPY in the near term.
On the Euro front, the preliminary Eurozone Harmonized Index of Consumer Prices (HICP) inflation eased to 2.5% YoY in June from 2.6% in May. However, these inflation reports were unlikely to encourage the ECB to cut interest rates again at its next policy meeting on 18 July. “Nothing in these figures would make the ECB cut again in July, and we think it’ll be eagerly awaiting data over the summer before seriously debating a next rate cut in September,” said Bert Colijn, senior eurozone economist at the Dutch bank ING.
On Monday, the ECB president Christine Lagarde said that the recent economic developments suggested that further interest rate cuts are not urgent. The divergence in monetary policy between the Eurozone and Japan continues to support the Euro for the time being.
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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