- EUR/JPY attracts some buyers on Thursday amid a modest JPY downtick.
- The divergent BoJ-ECB policy expectations keep a lid on any further upside.
- The cautious market mood also warrants some caution for aggressive bulls.
The EUR/JPY cross stages a modest bounce of over 50 pips from the 158.70 region, or a four-week low touched during the Asian session on Thursday, albeit lacks strong follow-through buying. Spot prices currently trade around the 159.20-159.25 area, and for now, seem to have stalled this week's retracement slide from the vicinity of the 163.00 round figure.
The emergence of some selling around the Japanese Yen (JPY) turns out to be a key factor lending some support to the EUR/JPY cross, though the fundamental backdrop warrants some caution before positioning for any further appreciating move. That said, the divergent Bank of Japan (BOJ)-European Central Bank (ECB) policy expectations should help limit the JPY losses and keep a lid on the currency pair.
The markets have been pricing in the possibility of another BoJ rate hike by the end of this year and the bets were reaffirmed by data showing that real wages in Japan rose for the second straight month in July. Adding to this, BoJ Board Member Hajime Takata said that we must adjust monetary conditions by another gear if we can confirm that firms will continue to increase capital expenditure, wages, and prices.
In contrast, the ECB is almost certain to cut interest rates again in September in the wake of declining inflation in the Eurozone. Apart from this, the cautious market mood might underpin the safe-haven JPY and contribute to capping the upside for the EUR/JPY cross. Hence, it will be prudent to wait for strong follow-through buying before confirming a near-term bottom and positioning for any meaningful upside.
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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