- EUR/JPY struggles to capitalize on Monday’s recovery from a near one-month low.
- Intervention fears and geopolitical risks revive demand for the JPY and put pressure on it.
- Uncertainty over the BoJ rate hike limits the JPY’s gains and helps limit the cross’s losses.
The EUR/JPY cross encounters fresh bid during the Asian session on Tuesday and reverses some of the previous day’s recovery move from the 50-day SMA, around the 162.25 region, or a low of almost a month. The intraday drop is sponsored by the emergence of new buying around the Japanese Yen (JPY) and drags spot prices back close to the 163.00 mark in the last hour, although it lacks follow-up.
Geopolitical tensions escalated after the Biden administration approved Ukraine’s use of long-range U.S. weapons inside Russia, which has deployed North Korean troops to reinforce its war. This, along with speculation that Japanese authorities will intervene in the currency market to shore up the domestic currency, turn out to be key factors undermining the JPY as a safe haven and putting some downward pressure on the EUR/JPY cross.
The common currency, on the other hand, is struggling to attract buyers amid expectations of more aggressive rate cuts by the European Central Bank (ECB) due to the bleak economic outlook for the Eurozone. Added to this are the protectionist policies of US President-elect Donald Trump, which pose additional threats to the Eurozone economy. This could continue to weigh on the Euro and suggests that the path of least resistance for the EUR/JPY cross is to the downside.
That said, uncertainty over the timing of another interest rate hike by the Bank of Japan (BoJ) could act as a headwind for the JPY amid a generally positive risk tone. This, in turn, could help the EUR/JPY cross attract some buyers on dips and help limit the downside near the 50-day SMA. Such support should act as a key pivot point, which if broken should pave the way for the resumption of the recent correction from a multi-year high.
The Bank of Japan FAQs
The Bank of Japan (BoJ) is the Japanese central bank, which sets the country’s monetary policy. Its mandate is to issue banknotes and carry out monetary and currency control to ensure price stability, which means an inflation target of around 2%.
The Bank of Japan has embarked on ultra-loose monetary policy since 2013 in order to stimulate the economy and fuel inflation amid a low inflation environment. The bank’s policy is based on Quantitative and Qualitative Easing (QQE), or printing of banknotes to buy assets such as government or corporate bonds to provide liquidity. In 2016, the bank doubled down on its strategy and further relaxed policy by first introducing negative interest rates and then directly controlling the yield on its 10-year government bonds.
The Bank of Japan’s massive stimulus has caused the Yen to depreciate against its major currency pairs. This process has been exacerbated more recently by a growing policy divergence between the Bank of Japan and other major central banks, which have opted to sharply raise interest rates to combat inflation levels that have been at record highs for decades. The Bank of Japan’s policy of keeping rates low has caused the differential with other currencies to increase, dragging down the value of the Yen.
The weakness of the Yen and the rebound in global energy prices have caused a rise in Japanese inflation, which has exceeded the 2% target set by the Bank of Japan. Even so, the Bank of Japan judges that sustainable and stable achievement of the 2% objective is still not in sight, so a sudden change in current monetary policy seems unlikely.
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.
