- The EUR/JPY remains backed while the ECB adopts a dovish tone and the BOJ maintains an Ultra Laxa policy position.
- The EUR/JPY is negotiated firm before Japan inflation data.
- The euro looks for directional clues in Friday’s German PPI, since weak impressions could reinforce the expectations of a relief by the ECB.
The EUR/JPY remains close to the level of 167.00 on Thursday, while the markets digest the cautionary comments of those responsible for the European Central Bank (ECB) and prepare for key monetary policy updates of the Bank of Japan.
Although the euro (EUR) faced a slight pressure at the beginning of the session, a Japanese yen (JPY) in general weakest helped maintain the backed crossing, since investors remained focused on the divergent policy trajectories between the ECB and the Bank of Japan (Boj).
ECB spokesmen suggest the possibility of feat cuts in the future
Speaking on Thursday at the European University Institute in Italy, François Villeroy of Galhau, governor of the Bank of France and member of the Governing Council of the ECB, said that the next movement in interest rates “would probably be a cut” within the next six months, provided there are no large geopolitical clashes.
He warned that external risks, such as an increase in oil prices or new military developments in the Middle East, could delay the relief of politics, but emphasized the disposition of the ECB to gradually loosen the policy if inflation dynamics allow it.
His comments reinforced the preference of the ECB for a patient and data -based approach, adding to market expectations for a possible rate cut in the third quarter.
Also on Thursday, the president of Bundesbank, Joachim Nagel, supported the cautious tone, noting that the inflation of the euro zone had cooled to 1.9% in May, effectively reaching the objective of 2% of the ECB. Even so, he urged a “meeting by meeting” approach for rates decisions, citing the persistent uncertainty about global economic conditions and geopolitical risks.
The Japanese yen remains cautious before the records of the Boj
On the Japanese side, the governor of the Boj, Kazuo Ueda, reiterated that Japan needs to see a “sustainable and stable” increase in inflation before increasing interest rates.
His comments, delivered earlier this week, effectively rejected the speculation of an increase in rates as soon as in July. With Japan’s policy rate still close to zero and inflation expectations remaining contained, the Yen has been under pressure, supporting the widest upward trend in the EUR/JPY.
Looking ahead, several key risk events could influence the next movement in the EUR/JPY.
On Friday, the publication of the purchasing managers index (PMI) of Manufacturing and Services of the euro zone for June will provide a timely snapshot of the business activity in the block.
A reading below the 50.0 threshold would point out contraction and could reinforce market expectations for ECB fees, putting renewed pressure on the euro.
Meanwhile, the minutes of the Boj meeting on Thursday, scheduled for 23:50 GMT, will be observed closely in search of any indication of a change in the policy position.
Geopolitical tensions also remain a critical wild card, with the ongoing conflict between Israel and will raise the risk of flows towards the Yen as a safe refuge. If the situation intensifies, it could limit the EUR/JPY profits despite the underlying foundations of the euro zone.
US interest rates
Financial institutions charge interest rates on loans to borrowers and pay them as interest to savers and depositors. They influence the basic types of interest, which are set by central banks based on the evolution of the economy. Normally, central banks have the mandate to guarantee the stability of prices, which in most cases means setting as an objective an underlying inflation rate around 2%.
If inflation falls below the objective, the Central Bank can cut the basic types of interest, in order to stimulate credit and boost the economy. If inflation increases substantially above 2%, the Central Bank usually rises the interest rates of basic loans to try to reduce inflation.
In general, higher interest rates contribute to reinforce the currency of a country, since they make it a more attractive place for world investors to park their money.
The highest interest rates influence the price of gold because they increase the opportunity cost of maintaining gold instead of investing in an asset that accrues interest or depositing effective in the bank.
If interest rates are high, the price of the US dollar (USD) usually rises and, as gold quotes in dollars, the price of low gold.
The federal funds rate is the type to a day that US banks lend each other. It is the official interest rate that the Federal Reserve usually sets at its FOMC meetings. It is set at a fork, for example 4.75%-5.00%, although the upper limit (in this case 5.00%) is the aforementioned figure.
Market expectations on the interest rate of the Federal Reserve funds are followed by the Fedwatch of the CME tool, which determines the behavior of many financial markets in the forecast of future monetary policy decisions of the Federal Reserve.
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.
