EUR/JPY attracts some sellers to near 161.00, ECB rate decision in focus
- EUR/JPY extends downside to around 161.05 in Thursday’s early European session, down 0.43% on the day.
- The ECB is expected to cut rates at its January meeting on Thursday.
- Rising bets for more BoJ rate hikes lift the Japanese Yen and act as a headwind for EUR/JPY.
The EUR/JPY cross extends the decline to near 161.05 during the early European session on Thursday. The rising expectation that the European Central Bank (ECB) is set to kick off its 2025 meetings with another interest rate cut on Thursday continues to undermine the Euro (EUR) against the Japanese Yen (JPY). Also, the preliminary reading of Gross Domestic Product (GDP) from the Eurozone for the fourth quarter will be released later in the day.
The ECB is widely anticipated to cut its key interest rate by another 25 basis points (bps) to 2.75% and continue its easing cycle amid an uncertain economic outlook and sticky service inflation. “We expect the ECB to cut by 25 basis points at each of the four governing council meetings in the first half of the year, lowering the policy rate to 2.00% by mid-year,” noted Mark Wall, chief economist at Deutsche Bank.
Furthermore, the cautious sentiment and the rising speculation that the Bank of Japan (BoJ) will further raise the interest rates provide some support to the JPY and create a headwind for the cross. On Tuesday, former BoJ board member Makoto Sakurai said that broadening wage hikes, prospects of sustained price rises, and solid economic growth give the BoJ scope to continue raising rates steadily.
ECB FAQs
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy for the region. The ECB primary mandate is to maintain price stability, which means keeping inflation at around 2%. Its primary tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger 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.
In extreme situations, the European Central Bank can enact a policy tool called Quantitative Easing. QE is the process by which the ECB prints Euros and uses them to buy assets – usually government or corporate bonds – from banks and other financial institutions. QE usually results in a weaker Euro. QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The ECB used it during the Great Financial Crisis in 2009-11, in 2015 when inflation remained stubbornly low, as well as during the covid pandemic.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the European Central Bank (ECB) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the ECB stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Euro.
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