EUR/JPY slides back below mid-156.00s amid modest JPY strength, lacks follow-through
- EUR/JPY meets with a fresh supply on Tuesday and stalls its recovery from over a one-month low.
- The divergent BoJ-ECB outlook continues to act as a headwind for the cross and exerts pressure.
- Traders might prefer to wait for the key BoJ policy meeting before placing fresh directional bets.
The EUR/JPY cross attracts fresh sellers following an Asian session uptick to the 157.10 area and stalls its modest recovery move from the vicinity of the 155.00 psychological mark, or the lowest level since August touched the previous day. Spot prices drop to the 154.25-154.20 region in the last hour and seem vulnerable to prolong the recent downward trajectory witnessed over the past two weeks or so.
The Japanese Yen (JPY) continues to be underpinned by the recent hawkish signals from the Bank of Japan (BoJ) officials that the central bank will raise interest rates further by the end of this year. Apart from this, the market nervousness ahead of this week's key central bank event risks turns out to be another factor that benefits the JPY's relative safe-haven status and exerts downward pressure on the EUR/JPY cross.
The US Federal Reserve (Fed) is scheduled to announce its policy decision at the end of a two-day meeting on Wednesday, which will be followed by the Bank of England (BoE) policy update. The focus, however, will remain glued to the highly anticipated BoJ policy update on Friday, which will influence the near-term JPY price dynamics and determine the next leg of a directional move for the EUR/JPY cross.
In the meantime, the prevalent US Dollar (USD) selling bias, amid bets for an oversized rate cut by the Federal Reserve (Fed), is seen lending some support to the shared currency. This might hold back traders from placing aggressive bearish bets around the EUR/JPY cross and help limit deeper losses. That said, the divergent BoJ-ECB policy outlook suggests that the path of least resistance for spot prices remains to the downside.
It is worth recalling that the European Central Bank (ECB) decided last week to cut interest rates for the second time this cycle and indicated a declining path for borrowing costs in the months ahead. However, reports that the ECB policymakers see an interest rate cut in October as unlikely, barring a major deterioration in the outlook for growth, might continue to offer some support to the Euro and the EUR/JPY cross.
Bank of Japan FAQs
The Bank of Japan (BoJ) is the Japanese central bank, which sets monetary policy in the country. Its mandate is to issue banknotes and carry out currency and monetary control to ensure price stability, which means an inflation target of around 2%.
The Bank of Japan has embarked in an ultra-loose monetary policy since 2013 in order to stimulate the economy and fuel inflation amid a low-inflationary environment. The bank’s policy is based on Quantitative and Qualitative Easing (QQE), or printing notes to buy assets such as government or corporate bonds to provide liquidity. In 2016, the bank doubled down on its strategy and further loosened policy by first introducing negative interest rates and then directly controlling the yield of its 10-year government bonds.
The Bank’s massive stimulus has caused the Yen to depreciate against its main currency peers. This process has exacerbated more recently due to an increasing policy divergence between the Bank of Japan and other main central banks, which have opted to increase interest rates sharply to fight decades-high levels of inflation. The BoJ’s policy of holding down rates has led to a widening differential with other currencies, dragging down the value of the Yen.
A weaker Yen and the spike in global energy prices have led to an increase in Japanese inflation, which has exceeded the BoJ’s 2% target. With wage inflation becoming a cause of concern, the BoJ looks to move away from ultra loose policy, while trying to avoid slowing the activity too much.
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