EUR/JPY softens to near 180.50 as BoJ rate hike speculation bolsters Japanese Yen

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EUR/JPY weakens to near 180.60 in Friday’s early European session.
Rising bets for an imminent BoJ rate hike provide some support to the Japanese Yen.
Many ECB policymakers believe there is no urgency to lower rates further.

The EUR/JPY cross trades on a softer note around 180.60 during the early European session on Friday. The Japanese Yen (JPY) edges higher against the Euro (EUR) amid growing speculation that the Bank of Japan (BoJ) will raise interest rates when it meets in December. The third estimate of the Q3 Gross Domestic Product (GDP) Growth Rate from the Eurozone will be published later on Friday.

The BoJ is said to be leaning toward a rate hike at its December meeting, while keeping the option open for further tightening, Bloomberg reported on Friday, citing people familiar with internal discussions. BoJ Governor Kazuo Ueda said earlier on Monday that the Japanese central bank will consider the "pros and cons" of raising rates this month, signaling a strong chance of a hike at the December 18-19 meeting. This would be the first hike since January.

Eurozone inflation unexpectedly ticked up in November, suggesting that further rate cuts from the European Central Bank (ECB) are unlikely under current economic conditions. Rising bets that the ECB is done cutting interest rates could underpin the EUR against the JPY.

The expectations were reaffirmed by ECB President Christine Lagarde's comment earlier this week, saying that the central bank expects inflation to stay near its 2% goal in the coming months. Meanwhile, ECB policymaker Joachim Nagel stated that rates are currently in a "good place." He added that new forecasts in December will help determine if the bank is on track to meet its medium-term inflation target.

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.

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