- EUR/JPY gains sharply after advanced German HICP rose in line with expectations in January.
- The ECB cut its Deposit Facility rate by 25 bps to 2.75% on Thursday.
- The Japanese Yen meets profit booking after outperforming in the past few trading sessions.
The EUR/JPY pair soars to near 161.00 in Friday’s North American session. The asset attracts buyers after the release of the flash German Harmonized Index of Consumer Prices (HICP) data for January.
The German inflation came in line with estimates. Month-on-month HICP deflated by 0.2%, as expected, after a 0.7% increase in December. On year, the HICP data rose in line with estimates and the former release of 2.8%. The German Consumer Price Index (CPI) rose at a slower pace of 2.3%, compared to estimates and the former release of 2.6%.
Soft German inflation validates market expectations that the European Central Bank (ECB) will cut interest rates three times more this year. On Thursday, the ECB reduced its Deposit Facility rate by 25 basis points (bps) to 2.75%, as officials were confident that inflationary pressures would sustainably return to the desired rate of 2% this year.
In the press conference after the policy decision, ECB President Christine Lagarde keeps door open for further policy easing. Lagarde said that we are still in “restrictive territory” and it is premature to “anticipate at what point where will stop”. However, she avoided providing a pre-defined interest rate cut path and reiterated that we decide meeting by meeting on the basis of data.
Meanwhile, the Japanese Yen (JPY) underperforms across the board as investors take some profit after its recent outperformance. The Yen has performed strongly in the past few trading days on the assumption that the Bank of Japan (BoJ) will hike interest rates further this year. Last week, the BoJ hiked its borrowing rates by 25 bps to 0.5% but didn’t provide a specified tight policy path.
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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