EUR/JPY holds ground around 167.00 after Tokyo CPI inflation

EUR/JPY remains steady after the release of the softer inflation data on Friday.
The Tokyo CPI increased by 2.2% YoY in July, slightly down from the previous 2.3% rise.
The Euro may face challenges as the ECB remains uncertain about its policy outlook.

Akhtar Faruqui FXStreet

EUR/JPY hovers around 167.00 with a positive bias during the Asian session on Friday. The EUR/JPY cross holds mild gains after the Statistics Bureau of Japan released the Tokyo Consumer Price Index (CPI) data on Friday.

The headline Tokyo CPI for July increased by 2.2% year-over-year, slightly down from the previous 2.3% rise. The Tokyo CPI excluding Fresh Food and Energy went up by 1.5% YoY, compared to the earlier increase of 1.8%. Moreover, the CPI excluding Fresh Food also rose by 2.2% in July, matching market expectations.

However, the EUR/JPY cross may limit its upside as the Japanese Yen may receive support as traders potentially unwind their carry trades ahead of the Bank of Japan's two-day policy meeting, concluding on Wednesday. The BoJ is expected to raise interest rates, which causes short-sellers to close their positions and bolster the JPY. Additionally, the BoJ is widely anticipated to outline plans to taper its bond purchases to reduce massive monetary stimulus.

On the Euro front, the European Central Bank (ECB) is anticipated to lower interest rates two more times this year, as price pressures are expected to persist at current levels in 2024 and only return to the bank’s target in 2025. This sentiment puts pressure on the Euro, which could limit the upside of the EUR/JPY cross.

Meanwhile, a significant decline in Eurozone business activity, particularly in Germany, has heightened expectations for further interest rate cuts to stimulate economic growth. The German flash Composite Purchasing Managers Index (PMI) unexpectedly contracted in July. Euro traders will need to await next week’s pan-EU Gross Domestic Product (GDP) update for further insights.

Inflation FAQs

What is inflation?

Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.

What is the Consumer Price Index (CPI)?

The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.

What is the impact of inflation on foreign exchange?

Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.

How does inflation influence the price of Gold?

Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.

Author

Akhtar Faruqui

FXStreet

Akhtar Faruqui is a Forex Analyst based in New Delhi, India. With a keen eye for market trends and a passion for dissecting complex financial dynamics, he is dedicated to delivering accurate and insightful Forex news and analysis.

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