- EUR/JPY steadies around 161.85 in Friday’s early European session.
- Japan’s CPI inflation grew 3.6% YoY in March.
- The ECB cut rates by 25 bps to 2.25% at the April meeting on Thursday.
The EUR/JPY cross trades flat near 161.85 during the early European session on Friday. US President Donald Trump's trade war remains a source of deep uncertainty. However, Trump on Thursday offered some encouraging signals that negotiations with other countries could lead to lower tariffs. The optimism surrounding trade talks could undermine safe-haven currencies like the Japanese Yen (JPY).
Japan’s National Consumer Price Index (CPI) grew 3.6% year on year in March, marking three straight years that the headline inflation figure is above the Bank of Japan’s (BoJ) 2% target, the Japan Statistics Bureau revealed on Friday. This figure was lower than the 3.7% recorded in February.
Meanwhile, the so-called “core-core” inflation rate, which strips out prices of both fresh food and energy, rose to 2.9% YoY in March from 2.6% in February. The core inflation, which strips out prices of fresh food, jumped to 3.2% YoY in March from the previous reading of 3.0%. The figure was in line with the market consensus.
The data comes ahead of the BoJ's policy meeting on May 1. The BoJ is expected to keep interest rates steady at 0.5% and cut its growth estimates as Trump's steep tariffs cloud the economic outlook. Traders also closely monitor the developments in country-specific trade negotiations.
On the Euro front, the European Central Bank (ECB) cut its main interest rate by a quarter of a percentage point to 2.25% at its April meeting on Thursday, citing growing trade tensions after Trump’s tariffs sparked a global trade war. ECB President Christine Lagarde said during the press conference that US tariffs on EU goods, which had increased from an average of 3% to 13%, were already harming the outlook for the European economy.
The dovish stance from the ECB could weigh on the shared currency against the JPY. "It has a dovish tone. Focus has shifted to looking at the downside risk to the growth outlook, rather than upside risk to inflation,” said Kirstine Kundby-Nielsen, FX analyst at Danske Bank.
Inflation FAQs
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%.
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.
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.
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.
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