AUD/JPY trades near 109.00 after pulling back from fresh record highs

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AUD/JPY extends its gains for the second successive sessions, trading around 109.40 during the European hours on Tuesday.

AUD/JPY edges lower after hitting a all-time high of 109.56 on Tuesday.
The AUD rose after the RBA raised the cash rate 25 bps to 3.85%, as expected.
The JPY gains support amid political uncertainty ahead of February 8 election.

AUD/JPY extends its gains for the second successive sessions, trading around 109.40 during the European hours on Tuesday. The currency cross gains ground as the Australian Dollar (AUD) gained over 1% against the Japanese Yen (JPY) after the Reserve Bank of Australia's (RBA) decided to raise the Official Cash Rate (OCR) by 25 basis points (bps) to 3.85% from 3.6%, as expected.

The AUD/JPY cross remains stronger after the cautious remarks from the RBA Governor, Michele Bullock, during the post-meeting press conference. Bullock said inflation pressures remain too strong, warning it will take longer to return to target and is no longer acceptable. She stressed the board will stay data-dependent and avoid forward guidance.

The AUD/JPY cross could extend its gains as the Japanese Yen finds support amid political uncertainty ahead of the February 8 snap election, with Prime Minister Sanae Takaichi’s ruling party expected to gain seats and pursue expansionary fiscal policies.

Over the weekend, Takaichi described a weak Yen as an opportunity for export-driven industries, signaling tolerance for a softer currency. She later clarified the comments were meant to stress economic resilience to exchange-rate swings, while Finance Minister Satsuki Katayama said the remarks reflected standard economic principles on the effects of a weaker currency.

Interest rates FAQs

What are interest rates?

Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%. If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.

How do interest rates impact currencies?

Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.

How do interest rates influence the price of Gold?

Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank. If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.

What is the Fed Funds rate?

The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure. Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.