EUR/JPY gathers strength to near 157.00 as Germany considers to boost defence spending
- EUR/JPY gains ground to around 156.95 in Wednesday’s early European session.
- The Euro found support from growing optimism following reports that Germany is considering a €200 billion emergency defense fund.
- The prospect that the BoJ would raise interest rates further supports the JPY.
The EUR/JPY cross gathers strength to near 156.95 during the early European trading hours on Wednesday. Growing optimism around increased fiscal spending in Germany provides some support to the Euro (EUR).
According to a source familiar with the discussions, Germany's chancellor-in-waiting, Friedrich Merz, has begun conversations with the Social Democrats to quickly approve up to €200 billion ($210 billion) in special defense spending.
The remarks from the European Central Bank (ECB) officials will be closely watched ahead of the policy meeting next week. ECB policymaker Joachim Nagel said on Tuesday that the central bank has room to cut its interest rates further if inflation eases to its 2% target this year as it expects. Meanwhile, ECB board member Isabel Schnabel noted the ECB may be approaching a point where it needs to pause or halt rate reductions.
The ECB is widely expected to cut rates for a fifth straight time next week after seeing inflation fall from double digits to just over 2% in recent months. This might drag the shared currency lower against the Japanese Yen (JPY).
The Bank of Japan (BoJ) is expected to raise the interest rate from 0.50% to 0.75% this year, which could influence investor sentiment and underpin the JPY. "The market has interpreted this as the government tacitly accepting the rise in domestic interest rates, fueling speculation the BOJ might raise rates sooner than expected," said Yuzo Sakai, chief manager of business planning at Ueda Totan Forex Ltd.
Euro FAQs
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%).
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.
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.
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.
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.
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