EUR/JPY depreciates toward 177.00 due to possible BoJ rate hikes

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EUR/JPY continues its losses, trading around 177.20 during the Asian hours on Tuesday.

EUR/JPY falls as the Japanese Yen gains on the potential for a BoJ rate hike in upcoming meetings.
Traders remain uncertain about the next BoJ rate hike amid expectations of aggressive fiscal spending under PM Takaichi.
The Euro may receive support as traders expect no further ECB interest rate moves this year.

EUR/JPY continues its losses, trading around 177.20 during the Asian hours on Tuesday. The currency cross struggles as the Japanese Yen (JPY) receives support from last week’s hawkish comments from the Bank of Japan (BoJ) Governor Kazuo Ueda, signaling the possibility of a rate hike in December or January next year.

However, the uncertainty prevails about the timing of the next BoJ rate hike amid speculations that Japan's new Prime Minister Sanae Takaichi will pursue aggressive fiscal spending plans and resist policy tightening. Meanwhile, newly appointed Finance Minister Satsuki Katayama clarified that she no longer stands by her March assessment that the JPY’s fair value lies around 120–130 per dollar, emphasizing her current responsibility for overseeing currency policy.

However, the Euro (EUR) may receive support against its peers, limiting the downside of the EUR/JPY cross, from market expectations of no further interest rate moves by the European Central Bank (ECB) this year. The ECB kept interest rates unchanged for the third consecutive meeting in October, held last week, as expected, noting that the inflation outlook remains broadly stable, the economy continues to grow, and uncertainty persists.

Earlier data indicated that Eurozone inflation eased to slightly above the ECB’s 2% target, while third-quarter GDP growth surpassed expectations. Additionally, October business surveys indicated an improvement in overall sentiment.

ECB policymaker Francois Villeroy de Galhau noted that the central bank is in a good position after the October policy decision. However, Villeroy added that this position is not a fixed one. Governor of the Central Bank of Latvia, Martins Kazaks, said that risks to inflation and growth in the Eurozone are more balanced. Kazaks added that the central bank would act when necessary but should avoid reacting hastily.

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.