- EUR/JPY gains ground around 161.60 in Tuesday’s early European session, up 0.20% on the day.
- Investors will focus on the German Q2 GDP report, which is due on Tuesday.
- Hawkish signals from the BoJ are largely ignored as traders await fresh catalysts.
The EUR/JPY cross trades on a stronger note near 161.60 during the early European session on Tuesday. The uncertainty about the future rate path in Japan weighs on the Japanese Yen (JPY) and creates a tailwind for EUR/JPY.
The hawkish comments from the Bank of Japan’s (BoJ) Governor Kazuo Ueda fail to boost the JPY as traders await clearer guidance on the future rate path. Japan’s Tokyo Consumer Price Index (CPI) on Friday will be in the spotlight. BoJ’s Ueda said last week that the Japanese central bank could raise interest rates further if its economic projections are accurate.
Market players will also keep an eye on the geopolitical tensions in the Middle East. Any signs of escalation could boost safe-haven flows and lift the JPY. Hamas rejects fresh Israeli conditions in ceasefire talks in Egypt and insists that Israel be bound by the terms of a proposal laid out by US President Joe Biden and the UN Security Council, per local news agency Aljazeera.
The European Central Bank’s (ECB) chief economist Philip Lane said there had been “good progress” so far in taming price pressures in the Eurozone. However, the goal of getting inflation back to 2% is “not yet secure,” and the interest rates will need to stay restrictive for the time being. Investors will take more cues from the German Gross Domestic Product (GDP) for the second quarter, which is due on Tuesday.
Later this week, the Eurozone inflation data will be closely watched. Markets expect the ECB to cut interest rates twice this year, with the next move set for September. The ECB rate cut expectation might weigh on the Euro (EUR) against the JPY in the near term.
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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