EUR/JPY Climbs as Traders Expect Steady BoJ

Key Moments

EUR/JPY Supported by Weak Yen and Policy Expectations

EUR/JPY held firm near 183.10 in Asian trading on Tuesday, building on gains from the prior session. The cross strengthened as the Japanese Yen (JPY) remained under pressure, with the Bank of Japan (BoJ) widely anticipated to leave interest rates unchanged at 0.75% on Thursday.

Despite the Yen’s softness, potential official action is seen as a limiting factor on further downside. Expectations of possible intervention by Japanese authorities are providing some underlying support to the currency.

Japanese Officials Signal Vigilance on Market Volatility

Japan’s Finance Minister Satsuki Katayama highlighted rising turbulence in financial markets on Tuesday, noting that authorities are prepared to respond if needed, including in the foreign exchange market.

At the same time, BoJ Governor Kazuo Ueda commented that underlying inflation is gradually moving toward the central bank’s 2% objective. He added that policy will be managed appropriately to achieve stable and sustainable inflation.

Euro Benefits From Easing Oil Prices

The risk-sensitive EUR/JPY pair also drew support from improved sentiment toward the Euro (EUR), helped by a pullback in oil prices. Softer crude prices have been viewed as a positive factor for the Eurozone, where the economy is heavily dependent on imported energy. Elevated oil prices could otherwise act as a drag on regional growth.

Oil prices moved lower as multiple tankers passed safely through the Strait of Hormuz, and major economies were expected to release petroleum reserves to mitigate potential supply risks.

ECB Outlook and Policy Expectations

Market participants are looking for signals from European Central Bank (ECB) President Christine Lagarde on how the institution plans to address inflation pressures driven by conflict and higher energy costs.

The ECB is broadly expected to keep the Main Refinancing Rate unchanged at 2.15% on Thursday, while money markets have fully priced in a rate increase by July.

Euro FAQs

What is the Euro?

The Euro is the currency for the 20 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%).

What is the ECB and how does it impact the Euro?

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.

How does inflation data impact the value of the Euro?

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.

How does economic data influence the value of the Euro?

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.

How does the Trade Balance impact the Euro?

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.