- EUR/JPY declines to 163.35 in Wednesday’s early European session.
- German Factory Orders fell 5.4% MoM in November vs. 0% expected.
- Traders remain cautious about the timing of the next interest rate hike, which might weigh on the JPY.
The EUR/JPY cross pares recent gains to around 163.35 during the early European trading hours on Wednesday. The Euro (EUR) faces some selling pressure after the Germany's economic data. However, the downside for the cross might be limited amid the uncertainty about the timing of the Bank of Japan's (BoJ) next interest rate hike.
Data released by the Federal Statistics Office on Wednesday showed that Germany's Factory Orders unexpectedly slumped in November, highlighting the industry’s woes just weeks before Chancellor Olaf Scholz faces elections. German Factory Orders fell by 5.4% MoM in November, compared to a decline of 1.5% in the previous reading. This figure came in weaker than the 0% expected. The shared currency weakens against the Japanese Yen (JPY) in an immediate reaction to the downbeat German data.
Furthermore, the verbal intervention by Japanese authorities and the risk-off mood amid concerns about the ongoing geopolitical tensions in the Middle East could boost the safe-haven currency like the JPY and act as a headwind for EUR/JPY. On the other hand, the uncertainty surrounding the BoJ’s monetary policy next move might keep the JPY at a relatively weak level. BoJ Governor Kazuo Ueda said on Monday that the central bank will raise the policy interest rate to adjust the degree of monetary easing if economic and price conditions keep improving.
Euro FAQs
The Euro is the currency for the 19 European Union countries that belong to the Eurozone. It is the second most heavily traded currency in the world behind the US Dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily turnover of over $2.2 trillion a day. EUR/USD is the most heavily traded currency pair in the world, accounting for an estimated 30% off all transactions, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy. The ECB’s primary mandate is to maintain price stability, which means either controlling inflation or stimulating growth. Its primary tool is the raising or lowering of interest rates. Relatively high interest rates – or the expectation of higher rates – will usually benefit the 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.
Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), is an important econometric for the Euro. If inflation rises more than expected, especially if above the ECB’s 2% target, it obliges the ECB to raise interest rates to bring it back under control. Relatively high interest rates compared to its counterparts will usually benefit the Euro, as it makes the region more attractive as a place for global investors to park their money.
Data releases gauge the health of the economy and can impact on the Euro. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the single currency. A strong economy is good for the Euro. Not only does it attract more foreign investment but it may encourage the ECB to put up interest rates, which will directly strengthen the Euro. Otherwise, if economic data is weak, the Euro is likely to fall. Economic data for the four largest economies in the euro area (Germany, France, Italy and Spain) are especially significant, as they account for 75% of the Eurozone’s economy.
Another significant data release for the Euro is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought after exports then its currency will gain in value purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.
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