AUD/JPY maintains position near 94.00, downside risks appear due to hawkish BoJ
- AUD/JPY may weaken as the Japanese Yen finds support from the Bank of Japan’s hawkish policy outlook.
- The Australian Dollar declines after Thursday’s disappointing Private Capital Expenditure data.
- RBA Deputy Governor Andrew Hauser highlighted that Australia’s tight labor market remains a challenge for managing inflation.
AUD/JPY holds gains after two consecutive sessions of losses, trading near 94.00 during early European hours on Thursday. However, the currency cross faced downside pressure as the Japanese Yen gained support from strong expectations that the Bank of Japan (BoJ) will continue raising interest rates this year, driven by upside surprises in fourth-quarter inflation and robust wage growth.
Market participants in Japan are awaiting several key economic reports due on Friday. These reports, which include industrial production, retail sales, and Tokyo inflation, are expected to provide crucial insights into the BoJ’s future monetary policy direction.
The AUD/JPY cross could have encountered headwinds after disappointing Australian Private Capital Expenditure data released on Thursday, which showed an unexpected 0.2% contraction quarter-on-quarter in Q4 2024, missing market forecasts of 0.8% growth. This follows an upwardly revised 1.6% expansion in the previous quarter.
On Thursday, Reserve Bank of Australia (RBA) Deputy Governor Andrew Hauser expressed optimism about inflation trends but stressed the importance of seeing sustained progress. He also noted that Australia’s tight labor market continues to pose a challenge for controlling inflation.
Additionally, a Wall Street Journal report on the Australian Dollar’s outlook, citing the Commonwealth Bank of Australia (CBA), highlighted growing concerns over potential trade war risks driven by Trump. China’s response to these threats will be a key factor influencing the future performance of the AUD.
Interest rates FAQs
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.
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.
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.
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.
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