EUR/JPY weakens to near 177.50 as US, Japan sign deal to secure rare earths supply

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The EUR/JPY cross loses ground to near 177.60, snapping the five-day winning streak during the Asian trading hours on Tuesday.

EUR/JPY softens to around 177.60 in Tuesday’s Asian session.
Trump and Takaichi signed an agreement to ‘secure’ the rare earth supply.
Traders brace for the Bank of Japan and the European Central Bank interest rate decisions later on Thursday.

The EUR/JPY cross loses ground to near 177.60, snapping the five-day winning streak during the Asian trading hours on Tuesday. The Japanese Yen (JPY) strengthens against the Euro (EUR) after US President Donald Trump and Japan’s Prime Minister Sanae Takaichi signed a framework for securing the supply of critical minerals and rare earths. The Bank of Japan (BoJ) and the European Central Bank (ECB) interest rate decisions will be in the spotlight later on Thursday.

Trump and Takaichi met for the first time on Tuesday in Tokyo. Both countries signed an agreement laying out a framework to secure the mining and processing of rare earths and other critical minerals. These developments followed China’s recent decision to tighten export controls on the materials, which are crucial for a wide range of products.

Takaichi has vowed to realize a “golden age” in her country’s relations with the US at the start of a meeting with Trump. Easing trade tensions between the US and Japan provides some support to the JPY and acts as a headwind for the cross. Trump will meet China's Xi Jinping in South Korea on Thursday for high-level discussions amid a bruising trade war.

On the Euro’s front, the Socialist Party will decide by the end of the week whether to topple France’s Prime Minister Sebastien Lecornu’s government if next year’s fiscal plans don't include significant tax increases on the wealthy, per Bloomberg.

Standard & Poor’s (S&P) Global downgraded France’s rating

Euro FAQs

What is the Euro?

The Euro is the currency for the 19 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.

on Friday in a surprise update, citing political instability that put the government’s efforts to repair its finances at risk. Fears of political turmoil in France exert some selling pressure on the EUR against the JPY.

The ECB is anticipated to keep Eurozone borrowing costs at 2.0% for its third consecutive meeting, with inflation under control and the long-struggling Eurozone economy looking healthier. Investors will closely monitor the ECB President Christine Lagarde’s press conference for clues about the path forward.