EUR/JPY continues to fall below 159.50 after ECB rate cut

  • The ECB’s rate cut to 3% aims to anchor inflation closer to the 2% target amid current economic challenges.
  • The ECB’s updated forecasts suggest a gradual decline in inflation, with the IPCA expected at 1.9% by 2026.
  • Market attention now turns to ECB President Christine Lagarde’s upcoming press conference for more clues.

The Euro weakens against the Japanese Yen during the North American session after the European Central Bank (ECB) cut interest rates. At the time of writing, EUR/JPY is trading volatile within the range of 159.00-159.80.

EUR/JPY experiences volatility after ECB cuts interest rates and updates forecasts

The ECB reduced its three key interest rates by 25 bps, leaving the deposit rate at 3%. The monetary policy statement mentioned that the central bank is determined to bring inflation to its 2% target, adding that they are not pre-committed to a particular rate path.

ECB officials added that disinflation is “well underway” and that, despite evolving, inflation remains high.

At its meeting, the ECB updated its inflation and economic growth forecasts. The Harmonized Index of Consumer Prices (HICP) for 2024 is expected to end at 2.4%, down from 2.5%. By 2025 and 2026, the HICP is projected to end at 2.1% and 1.9%, respectively.

The core HICP is projected to end the year at 2.9%, unchanged from the previous forecast, and by 2025 and 2026 it is forecast to decline to 2.3% and 1.9%, respectively.

The Gross Domestic Product is expected to be 0.7% in 2024, 1.1% in 2025 and 1.4% in 2026.

Following the publication of the monetary policy statement, traders’ attention is focused on the press conference of ECB President Christine Lagarde at around 13:45 GMT.

EUR/JPY Price Forecast: Technical Outlook

EUR/JPY extended losses below 160.00, with traders eyeing a retest of the December 11 low of 158.64. In case of further weakness, the cross could fall towards the Tenkan-Sen at 158.45, before sliding to 158.00.

On the contrary, if buyers push the exchange rate above 160.00, this could pave the way to test the Kijun-Sen at 161.07.

The ECB FAQs

The European Central Bank (ECB), headquartered in Frankfurt (Germany), is the reserve bank of the euro zone. The ECB sets interest rates and manages the region’s monetary policy.
The ECB’s main mandate is to maintain price stability, which means keeping inflation at around 2%. Its main tool to achieve this is to raise or lower interest rates. Relatively high interest rates usually translate into a stronger Euro, and vice versa.
The Governing Council of the ECB takes monetary policy decisions at meetings held eight times a year. Decisions are made by the heads of the euro area’s national banks and six permanent members, including ECB President Christine Lagarde.

In extreme situations, the European Central Bank can launch 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. The result is usually a weaker Euro.
QE is a last resort when a simple lowering of interest rates is unlikely to achieve the objective of price stability. The ECB used it during the Great Financial Crisis of 2009-11, in 2015 when inflation remained stubbornly low, as well as during the coronavirus pandemic.

Quantitative tightening (QT) is the reverse of QE. It is carried out after QE, when the economic recovery is underway and inflation begins to rise. While in QE the European Central Bank (ECB) buys government and corporate bonds from financial institutions to provide them with liquidity, in QT the ECB stops buying more bonds and stops reinvesting the maturing principal of the bonds that are already possesses. It is usually positive (or bullish) for the Euro.

Source: Fx Street

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