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EUR/JPY continues to rise due to wide interest rate differential and lack of intervention

  • EUR/JPY extends its bullish trend as the Euro outperforms the Japanese Yen due to rising interest rates in the Eurozone.
  • Following suspicions of direct intervention by the Japanese authorities to strengthen the yen in early May, there has been no follow-up.
  • Weak data from Japan has reduced expectations that the BoJ will be in a position to raise interest rates further, further weakening the Yen.

EUR/JPY continues its upward trend on Monday, accumulating gains of more than two tenths to reach 169.50, as the wide interest rate differential between the Eurozone and Japan continues to favor the Euro (EUR) against the Japanese Yen (JPY ) – relatively higher interest rates attract greater inflows of foreign capital.

Furthermore, in the absence of recent direct intervention in the currency markets by the Japanese authorities to strengthen the Yen, the pair has been able to rise. The last time intervention was suspected was in late April and early May, when the EUR/JPY pair experienced sharp drops for no apparent reason leading to unconfirmed speculation of intervention.

The Bank of Japan's (BoJ) decision not to repeat a reduction in its bond buying operations on May 17, despite having done so on May 13, led the yen to weaken further. Reductions in bond purchases are seen as a form of tightening monetary policy – like raising interest rates – so the decision not to go ahead was seen as a slight shift towards a looser stance.

A series of weak data releases in Japan, such as the surprising 2.0% annualized drop in GDP in the first quarter, the lower-than-expected Tokyo CPI and the weak wage growth data in the 1st quarter, suggest that the BoJ will probably delay its next interest rate hike, after a one-off hike in March, which gives encouragement to EUR/JPY.

The Euro, for its part, is strengthening as positive data from the region suggests that the European Central Bank (ECB) will not need to cut interest rates as quickly as previously thought to stimulate economic growth. First quarter GDP data showed a 0.3% increase following two quarters of contraction and the biggest quarter of growth since Q3 2022. The Euro was also supported by relatively strong Eurozone PMI data for April. .

The ECB is widely expected to cut interest rates in June, but recent comments from ECB board member Isabel Schnabel suggest the governing council may not follow the June cut with a cut in July. On Monday, Martin Kazaks, head of monetary policy at the ECB, gave the green light to the rate cuts, saying that inflation was gradually falling to the ECB's target of 2.0%; however, he added that “the process (of cutting interest rates) must be gradual and we must not rush.”

Source: Fx Street

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