Euro pauses near 12-week high against Yen despite upbeat Eurozone PMI
- EUR/JPY edges lower after reaching a 12-week high on Thursday.
- Upbeat Eurozone PMI data fails to lift the Euro.
- Traders fully price in a September ECB rate hike, while the BoJ is expected to hold rates next week.
EUR/JPY consolidates modest losses on Friday as fresh data from Japan and the Eurozone fails to generate a strong market response. At the time of writing, the cross trades around 186.30 after reaching a 12-week high of 186.67 on Thursday.
The preliminary Eurozone HCOB Composite Purchasing Managers’ Index (PMI) rose to a five-month high of 51.9 in July, beating the market forecast of 50.2 and improving from 50.0 in June. The Services PMI climbed to a five-month high of 51.6 from 49.4, while the Manufacturing PMI increased to a three-month high of 52.0 from 51.4.
The stronger PMI figures reinforce signs of economic resilience despite heightened tensions in the Middle East, supporting expectations that the European Central Bank (ECB) can maintain a restrictive policy stance.
On Thursday, the ECB kept all three key interest rates unchanged after raising them by 25 basis points in June. The central bank reiterated that future policy decisions will depend on its assessment of the inflation outlook and the risks surrounding it.
Traders have fully priced in another rate increase at the September meeting. ECB policymaker Gediminas Šimkus said 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.” However, he added that policymakers “do not see second-round effects of higher inflation” and will have additional inflation data by September.
Meanwhile, the Japanese Yen remains broadly weak, keeping traders alert to the risk of intervention as USD/JPY stays pinned at a 40-year high. Elevated Oil prices and Japan’s relatively low interest rates continue to weigh on the currency.
Data released earlier on Friday showed that Japan’s headline National Consumer Price Index (CPI) rose 1.7% year-over-year in June, accelerating from 1.5% in May.
According to Reuters, citing three sources, the BoJ is expected to keep rates unchanged next week while warning that inflation could exceed its 2% target, although policymakers believe the threat of an immediate Oil-driven inflation shock has eased since April.
Bank of Japan FAQs
The Bank of Japan (BoJ) is the Japanese central bank, which sets monetary policy in the country. Its mandate is to issue banknotes and carry out currency and monetary control to ensure price stability, which means an inflation target of around 2%.
The Bank of Japan embarked in an ultra-loose monetary policy in 2013 in order to stimulate the economy and fuel inflation amid a low-inflationary environment. The bank’s policy is based on Quantitative and Qualitative Easing (QQE), or printing notes to buy assets such as government or corporate bonds to provide liquidity. In 2016, the bank doubled down on its strategy and further loosened policy by first introducing negative interest rates and then directly controlling the yield of its 10-year government bonds. In March 2024, the BoJ lifted interest rates, effectively retreating from the ultra-loose monetary policy stance.
The Bank’s massive stimulus caused the Yen to depreciate against its main currency peers. This process exacerbated in 2022 and 2023 due to an increasing policy divergence between the Bank of Japan and other main central banks, which opted to increase interest rates sharply to fight decades-high levels of inflation. The BoJ’s policy led to a widening differential with other currencies, dragging down the value of the Yen. This trend partly reversed in 2024, when the BoJ decided to abandon its ultra-loose policy stance.
A weaker Yen and the spike in global energy prices led to an increase in Japanese inflation, which exceeded the BoJ’s 2% target. The prospect of rising salaries in the country – a key element fuelling inflation – also contributed to the move.
