- EUR/JPY struggles to capitalize on the previous day’s positive move amid renewed JPY buying.
- BoJ rate hike bets, geopolitical risks, China’s economic woes underpin the JPY and exert pressure.
- The ECB’s dovish outlook warrants some caution before positioning for any meaningful upside.
The EUR/JPY cross comes under some renewed selling pressure on Thursday and moves away from the weekly peak, around the 161.45 region touched the previous day. Spot prices, however, bounced nearly 100 pips from the daily low and traded with modest intraday losses, just below the 160.00 psychological mark during the early European session.
The Japanese Yen (JPY) gains some positive traction after the Bank of Japan’s (BoJ) summary of opinions from the July meeting indicated that some members see room for further rate hikes and policy normalization. Apart from this, concerns about an economic downturn in the US and China, along with escalating geopolitical tensions in the Middle East, further underpin the safe-haven JPY, which, in turn, exerts pressure on the EUR/JPY cross.
The shared currency, on the other hand, draws some support from the emergence of some selling around the US Dollar (USD) and better-than-expected German data released this week – Factory Orders and Industrial Production figures. That said, the European Central Bank's (ECB) downbeat view of the Eurozone's economic prospects and expectations for additional interest rate cuts by the end of this year might cap the upside for the Euro.
In the absence of any relevant market-moving economic releases on Thursday, the aforementioned fundamental backdrop makes it prudent to wait for a strong follow-through buying before confirming that the EUR/JPY cross has bottomed out. Meanwhile, a sustained strength beyond the overnight swing high, around the 161.45 zone, will set the stage for an extension of this week's goodish recovery from the 154.40-154.35 region, or the YTD low.
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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