EUR/JPY struggles to build on its recovery from multi-month low beyond mid-157.00s
- EUR/JPY rebounds over 80 pips from a multi-month low touched earlier this Friday.
- IMF’s warning of spillovers from rising foreign market volatility weighs on the JPY.
- The divergent BoJ-ECB policy outlook keeps a lid on any further gains for the cross.
The EUR/JPY cross stages a goodish intraday recovery from the 156.75 area, or its lowest level since early December touched earlier this Friday and for now, seems to have snapped a two-day losing streak. The momentum lifts spot prices back above mid-157.00s during the Asian session and is sponsored by the emergence of some selling around the Japanese Yen (JPY).
A senior International Monetary Fund official said on Friday that Japan’s services inflation remains below the 2% target, which is why it remains appropriate for the Bank of Japan (BoJ) to maintain accommodative monetary policy. This, in turn, weighs on the JPY and assists the EUR/JPY cross to rebound around 85 pips from the daily low. That said, the growing acceptance that the BoJ will maintain its stance to steadily push up borrowing costs helps limit any further JPY depreciation.
In fact, Kazuhiro Masaki, Director General of the BoJ's monetary affairs department, said on Thursday that the central bank will continue to raise interest rates if underlying inflation accelerates toward its 2% target as projected. This marks a big divergence in comparison to the European Central Bank's (ECB) dovish stance. Adding to this concerns that US President Donald Trump would slap tariffs on goods from the European Union undermine the Euro and cap the EUR/JPY cross.
Hence, it will be prudent to wait for strong follow-through buying before confirming that spot prices have formed a near-term bottom and positioning for any further appreciating move. Even from a technical perspective, the recent repeated failures near the very important 200-day Simple Moving Average (SMA) and a subsequent decline below the 160.00 psychological mark confirmed a bearish multiple-top breakdown, suggesting that the attempted recovery is likely to get sold into.
Euro FAQs
The Euro is the currency for the 19 European Union countries that belong to the Eurozone. It is the second most heavily traded currency in the world behind the US Dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily turnover of over $2.2 trillion a day. EUR/USD is the most heavily traded currency pair in the world, accounting for an estimated 30% off all transactions, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy. The ECB’s primary mandate is to maintain price stability, which means either controlling inflation or stimulating growth. Its primary tool is the raising or lowering of interest rates. Relatively high interest rates – or the expectation of higher rates – will usually benefit the Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.
Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), is an important econometric for the Euro. If inflation rises more than expected, especially if above the ECB’s 2% target, it obliges the ECB to raise interest rates to bring it back under control. Relatively high interest rates compared to its counterparts will usually benefit the Euro, as it makes the region more attractive as a place for global investors to park their money.
Data releases gauge the health of the economy and can impact on the Euro. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the single currency. A strong economy is good for the Euro. Not only does it attract more foreign investment but it may encourage the ECB to put up interest rates, which will directly strengthen the Euro. Otherwise, if economic data is weak, the Euro is likely to fall. Economic data for the four largest economies in the euro area (Germany, France, Italy and Spain) are especially significant, as they account for 75% of the Eurozone’s economy.
Another significant data release for the Euro is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought after exports then its currency will gain in value purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.