Key Moments
- EUR/JPY trades near 186.30 after touching a 12-week high of 186.67 on Thursday.
- Eurozone July preliminary Composite PMI rises to 51.9, beating the 50.2 forecast and June’s 50.0 reading.
- Markets fully price a September ECB rate hike, while the BoJ is expected to keep rates unchanged next week.
Euro-Yen Cross Backs Off Recent Peak
EUR/JPY is posting slight declines on Friday, consolidating after a sharp advance that pushed the pair to a 12-week high of 186.67 on Thursday. The cross is trading around 186.30, with new data from both Japan and the Eurozone failing to trigger a strong directional move.
Eurozone PMI Signals Resilience
Preliminary July survey data for the Eurozone point to improving business conditions. The HCOB Composite Purchasing Managers’ Index (PMI) climbed to 51.9, a five-month high, exceeding the market expectation of 50.2 and up from 50.0 in June.
The Services PMI advanced to 51.6 in July, also a five-month high, compared with 49.4 in June. Manufacturing activity strengthened as well, with the Manufacturing PMI rising to 52.0, a three-month high, from 51.4.
The stronger PMI readings highlight ongoing economic resilience in the Eurozone despite heightened tensions in the Middle East. This backdrop supports the view that the European Central Bank can maintain a restrictive monetary stance.
| Indicator | July (Preliminary) | Prior | Comment |
|---|---|---|---|
| Eurozone HCOB Composite PMI | 51.9 | 50.0 | Five-month high; above 50.2 forecast |
| Eurozone Services PMI | 51.6 | 49.4 | Five-month high |
| Eurozone Manufacturing PMI | 52.0 | 51.4 | Three-month high |
ECB Holds Rates, September Hike Fully Priced
On Thursday, the ECB left all three of its key interest rates unchanged, following a 25 basis point increase in June. The Governing Council reiterated that upcoming policy decisions will be guided by its evaluation of the inflation outlook and associated risks.
Market participants have fully priced in another rate hike at the September policy meeting. ECB policymaker Gediminas Šimkus commented on Friday that “inflation is seen higher than target for a long time” and that he still sees “the probability of a rate hike higher than a hold.” He also noted that policymakers “do not see second-round effects of higher inflation” and will have additional inflation data available by September.
Yen Pressured as Intervention Risk Lingers
The Japanese Yen remains broadly weak, with traders closely monitoring the risk of potential official intervention. USD/JPY is described as pinned at a 40-year high, underscoring the persistent downward pressure on the Yen.
Elevated Oil prices and Japan’s relatively low interest rates continue to weigh on the currency, reinforcing the divergence in monetary policy expectations between Japan and other major economies.
Japan Inflation Data and BoJ Outlook
Fresh inflation data from Japan released on Friday showed that the National Consumer Price Index (CPI) increased 1.7% year-over-year in June, up from 1.5% in May.
According to Reuters, citing three sources, the Bank of Japan is expected to keep interest rates unchanged next week while signaling that inflation could surpass its 2% target. At the same time, policymakers are reported to believe that the immediate risk of an Oil-driven inflation shock has diminished compared with April.
Bank of Japan – Structure and Policy Framework
The Bank of Japan (BoJ) serves as Japan’s central bank and is responsible for setting the country’s monetary policy. Its mandate includes issuing banknotes and conducting currency and monetary control with the objective of ensuring price stability, defined as an inflation target of around 2%.
The BoJ initiated an ultra-loose monetary strategy in 2013 to stimulate growth and push inflation higher in a low-inflation environment. This approach relied on Quantitative and Qualitative Easing (QQE), which involves creating money to purchase assets such as government and corporate bonds in order to inject liquidity into the financial system.
In 2016, the BoJ expanded this stance further by introducing negative interest rates and adopting direct yield curve control on 10-year Japanese government bonds. In March 2024, the central bank raised interest rates, marking a move away from its extended ultra-loose policy framework.
Impact of BoJ Policy on the Yen
The extensive stimulus program implemented by the BoJ contributed to a depreciation of the Yen against major currencies. This weakening trend intensified in 2022 and 2023 as policy divergence widened between the BoJ and other key central banks that sharply increased interest rates to counter high inflation. The resulting interest rate differential pressured the Yen lower.
This trajectory partially reversed in 2024 when the BoJ began rolling back its ultra-loose measures.
Drivers Behind BoJ Policy Shift
A combination of a weaker Yen and rising global energy prices pushed Japanese inflation above the BoJ’s 2% target. Expectations for higher wages in Japan – an important driver of inflation dynamics – also played a role in prompting the central bank to start unwinding its ultra-accommodative stance.
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