- EUR/JPY loses traction to around 156.25 in Thursday’s Asian session, down 0.24% on the day.
- Trump’s tariff threat boosts the safe-haven flows, supporting the Japanese Yen.
- The Eurozone inflation eases, triggering the ECB rate cut bets.
The EUR/JPY cross falls to near 156.25 during the Europeam session on Tuesday. The Japanese Yen (JYP) edges higher due to the risk-off mood and fresh fear of trade tension from US President Donald Trump. Investors will keep an eye on the Fedspeak later on Tuesday.
Demand for safe-haven assets surges amid growing concerns over tariff risks. Japan's Finance Minister Katsunobu Kato said early Tuesday that the country is not pursuing a policy of devaluing the Japanese Yen. Additionally, concerns about the potential economic slowdown in the US increased expectations of further interest rate cuts by the Federal Reserve (Fed). This, in turn, could weigh on the Greenback and benefit the JPY's relative safe-haven status.
The rising speculation that the Bank of Japan (BoJ) will raise the interest rate sooner than later might continue to underpin the JPY. The BoJ is widely anticipated to continue hiking this year, supported by improving economic conditions, rising prices, and stronger wage growth, which align with the Japanese central bank’s policy normalization efforts.
On the Euro’s front, the European Central Bank (ECB) is expected to cut its Deposit Facility Rate by 25 basis points (bps) to 2.5%, weighing in the Euro (EUR). Consumer price inflation in the Eurozone slowed to 2.4% in February from the previous reading of 2.5% and moving a step closer to the ECB's 2% target.
ECB FAQs
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy for the region. The ECB primary mandate is to maintain price stability, which means keeping inflation at around 2%. Its primary tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger 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.
In extreme situations, the European Central Bank can enact a policy tool called Quantitative Easing. QE is the process by which the ECB prints Euros and uses them to buy assets – usually government or corporate bonds – from banks and other financial institutions. QE usually results in a weaker Euro. QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The ECB used it during the Great Financial Crisis in 2009-11, in 2015 when inflation remained stubbornly low, as well as during the covid pandemic.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the European Central Bank (ECB) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the ECB stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Euro.
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