- EUR/JPY loses ground as BoJ signals further rate hikes if economic outlook meets expectations.
- The Fitch Ratings report suggests the BoJ could raise rates to 0.5% by the end of 2024.
- ECB policymaker Joachim Nagel said underlying inflation was moving in the right direction.
EUR/JPY is trading lower near 156.20 during the Asian session on Friday, continuing to receive support from hawkish signals from the Bank of Japan (BoJ). The BoJ has indicated that it could raise interest rates further if the economic outlook meets expectations.
Fitch Ratings’ latest report on the Bank of Japan’s policy outlook suggests the BoJ could raise rates to 0.5% by end-2024, 0.75% in 2025, and 1.0% by end-2026. The BoJ is deviating from the global trend of policy easing, having raised rates more aggressively than anticipated in July. This move underlines its growing confidence that reflation is now firmly established.
On Thursday, hawkish BoJ policymaker Naoki Tamura said the central bank should raise interest rates to at least 1% as early as the second half of the next fiscal year. The comment reinforces the BoJ’s commitment to continued monetary tightening. Tamura noted that the likelihood of Japan’s economy sustainably achieving the BoJ’s 2% inflation target was improving, indicating that conditions for further rate hikes are becoming more favorable, according to Reuters.
The European Central Bank (ECB) lowered the rate on the Main Refinancing Operations to 4.0% with a 25 basis point cut on Thursday. Moreover, in an interview with Deutschlandfunk early Friday, ECB policymaker and Bundesbank President Joachim Nagel mentioned that “core inflation is also moving in the right direction.” Nagel expects the inflation target to be achieved by the end of next year.
Traders are awaiting Eurozone Industrial Production data due later today. The monthly figure is expected to decline by 0.3% in July, following a previous fall of 0.1%. Meanwhile, the annual data is expected to show a decline of 2.7%, an improvement on the previous fall of 3.9%.
Interest Rates FAQs
Financial institutions charge interest rates on loans to borrowers and pay them out as interest to savers and depositors. These are influenced by base interest rates, which are set by central banks based on economic developments. Central banks are typically mandated to ensure price stability, which in most cases means targeting an underlying inflation rate of around 2%.
If inflation falls below target, the central bank can cut base interest rates, in order to stimulate lending and boost the economy. If inflation rises substantially above 2%, the central bank typically raises base lending rates to try to reduce inflation.
In general, higher interest rates help strengthen a country’s currency by making it a more attractive place for global investors to park their money.
Higher interest rates influence the price of Gold because they increase the opportunity cost of holding Gold rather than investing in an interest-bearing asset or depositing cash in the bank.
If interest rates are high, the price of the US Dollar (USD) usually rises and since Gold is priced in dollars, the price of Gold falls.
The federal funds rate is the overnight rate at which U.S. banks lend to each other. It is the official interest rate typically set by the Federal Reserve at its FOMC meetings. It is set within a range, for example 4.75%-5.00%, although the upper limit (in this case 5.00%) is the figure quoted.
Market expectations for the Federal Reserve funds rate are tracked by the CME’s FedWatch tool, which measures the behavior of many financial markets in anticipation of future Federal Reserve monetary policy decisions.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
