EUR/JPY trades with modest losses around 159.00, seems vulnerable near one-month low

EUR/JPY drifts lower on Friday amid sustained buying interest surrounding the JPY.
Hawkish BoJ expectations, along with a softer risk tone, benefit the safe-haven JPY.
Bets for a September ECB rate cut undermine the Euro and contribute to the slide.

The EUR/JPY cross struggles to capitalize on the previous day's modest bounce from the vicinity of mid-158.00s or a nearly one-month low and attracts some sellers during the Asian session on Friday. Spot prices currently trade around the 159.00 mark amid the prevalent buying interest surrounding the Japanese Yen (JPY).

Against the backdrop of hawkish Bank of Japan (BOJ) expectations, a generally weaker tone around the equity market is seen as a key factor underpinning the safe-haven JPY. In fact, the markets have been pricing in the possibility of another BOJ rate hike by the end of this year and the bets were reaffirmed by data released on Thursday, showing that real wages in Japan rose for the second straight month in July.

Furthermore, BoJ Board Member Hajime Takata said that we must adjust monetary conditions by another gear if we can confirm that firms will continue to increase capital expenditure, wages, and prices. In contrast, the European Central Bank (ECB) is almost certain to cut interest rates again in September in the wake of declining inflation in the Eurozone. This further contributes to the EUR/JPY pair's downtick.

The shared currency, however, seems to draw some support from a modest US Dollar (USD) weakness, led by bets for a larger interest rate cut by the Federal Reserve (Fed) later this month. This, in turn, might hold back traders from placing aggressive bearish bets around the EUR/JPY cross and help limit deeper losses. Nevertheless, spot prices remain on track to register losses for the third successive week.

Bank of Japan FAQs

What is the Bank of Japan?

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%.

What has been the Bank of Japan’s policy?

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.

How do Bank of Japan’s decisions influence the Japanese Yen?

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.

Is the Bank of Japan’s ultra-loose policy likely to change soon?

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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