EUR/JPY gathers strength above 173.50 on heightened political uncertainty in Japan

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The EUR/JPY cross rises to near 173.55 during the early European trading hours on Monday. The Japanese Yen (JPY) weakens against the Euro (EUR) following news that Japanese Prime Minister Shigeru Ishiba had resigned.

EUR/JPY gains ground to around 173.55 in Friday’s early European session, adding 0.43% on the day.
Japan PM Ishiba's resignation clouds the BoJ outlook, weighing on the JPY.
The French PM is set to lose a confidence vote on Monday.

Japan's Ishiba announced on Sunday that he will step down as leader of the world’s fourth-largest economy amid growing political discord within his party. Ishiba further stated that he would serve as Prime Minister until his replacement comes up. Concerns over political uncertainty exert some selling pressure on the JPY.

"From October onward, however, outcomes will in part depend on the next prime minister, so the situation should remain live," Hirofumi Suzuki, chief currency strategist at SMBC.

On the Euro front, investors will closely monitor French Prime Minister Francois Bayrou's confidence vote, which he is expected to lose. The turmoil threatens France's ability to rein in its debt, with the risk of further credit downgrades looming. Fears that the Eurozone's second-biggest economy might further fall into political uncertainty might cap the upside for the shared currency in the near term.

“The government will fall," said Jean-Luc Melenchon, the leading figure of the hard-left France Unbowed (LFI) party, echoing similar comments from others on the left and right.

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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%).

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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.