- EUR/JPY remains steady with downside risks amid verbal intervention from Japanese authorities.
- Japan’s Atsushi Mimura stated that recent Yen movements have been "somewhat rapid and one-sided."
- The Euro faced challenges as the ECB reduced its Rate on Deposit Facility to 3.25%.
The EUR/JPY pair remains stable around 162.60 during early European trading on Friday. The Japanese Yen (JPY) finds support from verbal interventions by Japanese authorities. A government spokesman stressed the importance of stable currency movements that align with economic fundamentals, emphasizing that officials are closely monitoring exchange rate fluctuations, especially any speculative activity, with increased vigilance.
Japan’s Vice Finance Minister for International Affairs, Atsushi Mimura, also commented on Friday that the recent Yen movements have been "somewhat rapid and one-sided." Mimura underscored that excessive volatility in the foreign exchange market is undesirable.
Meanwhile, Japan’s National Consumer Price Index (CPI) slowed to a year-on-year rate of 2.5% in September. The Core CPI, which excludes fresh food prices, dropped to 2.4%, down from a 10-month high of 2.8%.
The Euro came under downward pressure after the European Central Bank's (ECB) policy decision on Thursday. The ECB lowered its Main Refinancing Operations Rate and the Deposit Facility Rate by 25 basis points to 3.40% and 3.25%, respectively, in line with market expectations.
These consecutive rate cuts by the ECB in 13 years, lowered the Deposit Facility Rate to 3.25%. The decision comes in response to a sharp decline in inflation, which had surged to a peak of 10.6% in October 2022 but fell to 1.7% in September, now below the ECB’s 2% target.
During the post-meeting press conference, ECB President Christine Lagarde left the markets uncertain about the timing of future rate cuts, though she reassured that the Eurozone economy is on course for a soft landing.
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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