Key Moments
- EUR/JPY trades higher by 0.36% near 185.25 during the European session on Monday as the Japanese Yen lags major peers.
- A Reuters report last week indicated the BoJ is focused on the risk of inflation exceeding its 2% target and may upgrade its current-year growth outlook.
- Market participants anticipate at least one more ECB rate increase this year, with MUFC analysts calling for a 25 bps hike in September.
Euro Outperforms While Yen Struggles
The Euro (EUR) is gaining ground against the Japanese Yen (JPY) during the European trading session on Monday, rising 0.36% to trade near 185.25. The move comes as the Yen underperforms broadly, even as expectations persist that Japan’s inflation will stay above the Bank of Japan’s (BoJ) 2% target for an extended period.
Japanese Yen Price Performance
The Japanese Yen is weakening against a wide range of major currencies. According to the current performance snapshot, the Yen shows its largest loss versus the New Zealand Dollar.
| Base Currency | Quote Currency | Comment |
|---|---|---|
| JPY | NZD | JPY is the weakest against the New Zealand Dollar today |
A heat map of currency moves illustrates percentage changes among major pairs. The base currency is taken from the left column and the quote currency from the top row. For instance, selecting the Japanese Yen in the left column and moving across to the US Dollar cell shows the percentage change for JPY (base)/USD (quote).
BoJ Focused on Inflation Risks and Growth Outlook
A Reuters report released last week indicated that the BoJ will maintain its emphasis on the possibility of inflation overshooting the central bank’s target in its quarterly report scheduled for July. The same report suggested the BoJ could revise its economic growth projection for the current year to a higher level.
Such a combination of stronger inflation pressures and an upgraded growth forecast would likely reinforce expectations that the BoJ’s policy stance will continue to tilt toward the upside.
ECB Rate Expectations Support Euro
The Euro is also drawing support from increasing confidence that the European Central Bank (ECB) will implement another interest rate hike this year. Climbing energy prices, linked to renewed tensions between the United States (US) and Iran, have pushed global inflation expectations away from previous anchors.
Analysts at MUFC expect the ECB to deliver another 25 basis points (bps) rate increase at its September meeting.
Investors are now looking for fresh remarks from ECB officials on the inflation outlook in the Eurozone, following reports that the Strait of Hormuz – a key transit point for nearly one-fifth of global energy supply – is closed again.
Euro: Key Characteristics and Drivers
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%).
The Role of the ECB
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.
Impact of Inflation Data on 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.
Economic Data and 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.
Trade Balance and Currency Strength
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.
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