EUR/JPY is testing 183.15 high ahead of central banks’ decisions
- EUR/JPY has bounced from 181.60 and is testing long-term highs at 183.15
- The ECB is expected to leave interest rates unchanged at 2% on Thursday.
- The BoJ will, most likely, hike rates to 0.75% but fiscal concerns are weighing on the Yen.
The Yen remains on its back foot on Thursday, despite market expectations that the BoJ will hike interest rates on Friday. The EUR/JPY has extended its recovery from Wednesday’s lows at 181.60 and is pushing against a 35-year high, at 183.15 at the time of writing.
The Focus on Thursday is on the European Central Bank’s monetary policy meeting. The Bank is all but certain to keep its benchmark interest rate unchanged for the fourth consecutive time, and investors will be attentive to the bank's economic projections, amid rising speculation about the possibility of a rate hike in 2026.
Eurozone data release this week failed to provide any significant support to the Euro, however. The German IFO Business Climate Index deteriorated further, underscoring the weak economic momentum of the region’s major economy, and November’s inflation figures were revised lower, easing pressure on the ECB to hike interest rates any time soon.
In Japan, the BoJ is widely expected to hike rates by 25 basis points to 0.75% on Friday, but the path forward is unclear. Japan’s Prime Minister Takaichi defends low borrowing costs and is likely to oppose a steep tightening cycle.
Apart from that, investors remain wary that Takaichi’s big-spending polices might add further pressure on the already strained government debt and trigger a credit crisis. This has been keping the Yen vulnerable against its main peers over the last few weeks.
Central banks FAQs
Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.
A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.
A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.
Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.
Author
Guillermo Alcala
FXStreet
Graduated in Communication Sciences at the Universidad del Pais Vasco and Universiteit van Amsterdam, Guillermo has been working as financial news editor and copywriter in diverse Forex-related firms, like FXStreet and Kantox.
