- EUR/JPY attracts dip-buying on Tuesday and builds on the overnight bounce from a one-week low.
- The BoJ rate-hike uncertainty and a positive risk tone undermine the JPY, lending some support.
- ECB rate cut bets might hold back the Euro bulls from placing fresh bets and cap any further gains.
The EUR/JPY cross rallied nearly 130 pips from the Asian session low, around the 161.70 region and spikes to a fresh daily peak in the last hour amid the emergence of fresh selling around the Japanese Yen (JPY). Spot prices currently trade around the 163.00 mark, with bulls now looking to build on the overnight goodish recovery from the 160.40 area or a one-week low.
Japanese Prime Minister Fumio Kishida's decision to step down raises political uncertainty in the country and could hinder the Bank of Japan's (BoJ) plan to steadily lift interest rates from near zero. This, along with the underlying strong bullish sentiment across the global equity markets, is seen as a key factor undermining the safe-haven JPY and acting as a tailwind for the EUR/JPY cross.
That said, the risk of a further escalation of geopolitical tensions in the Middle East might keep a lid on the market optimism. Moreover, the incoming data from Japan point to an improving macroeconomic environment, which should encourage the BoJ to raise interest rates again later this year. This, along with dovish European Central Bank (ECB) expectations, should cap gains for the EUR/JPY cross.
In fact, the markets have been pricing in the possibility that the ECB will cut rates again in the wake of declining inflation in the Eurozone and downbeat economic outlook. The bets were reaffirmed by the overnight comments from Finnish central bank chief and ECB policymaker Olli Rehn, saying that the central bank may need to cut interest rates again in September given persistent economic weakness.
Hence, it will be prudent to wait for strong follow-through buying before positioning for the resumption of the recent solid recovery move from the 154.40-154.35 region, or the YTD low touched earlier this month. Investors now look forward to the release of the final Eurozone CPI print, which might influence the Euro and produce some short-term trading opportunities around the EUR/JPY cross.
Bank of Japan FAQs
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%.
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.
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.
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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