- EUR/JPY drifts lower for the third straight day amid some follow-through JPY buying.
- A suspected intervention and rising bets for another BoJ rate hike underpin the JPY.
- A weaker USD benefits the Euro and might help limit losses amid a positive risk tone.
The EUR/JPY cross trades with a negative bias for the third successive day on Tuesday, albeit manages to hold above the 170.00 psychological mark, or a nearly one-month low touched last week.
The Japanese Yen (JPY) continues to draw support from expectations the Bank of Japan (BoJ) could hike interest rates again at its upcoming policy meeting and a suspected intervention from authorities to prop up the domestic currency. Adding to this, the US political uncertainty drives some haven flows towards the JPY and turns out to be a key factor exerting downward pressure on the EUR/JPY cross.
Meanwhile, the European Central Bank (ECB) downgraded its view of the Eurozone's economic prospects and predicted that inflation would keep falling, leaving the door for a rate cut in September wide open. This contributes to the shared currency's relative underperformance and the offered tone surrounding the EUR/JPY cross, though a combination of factors could help limit deeper losses.
Dovish Federal Reserve (Fed) expectations keep the US Dollar (USD) bulls on the defensive and benefit the Euro. Furthermore, a generally positive risk tone might cap any further JPY appreciation and offer some support to the EUR/JPY cross. This makes it prudent to wait for acceptance below the 170.00 mark before positioning for an extension of the recent pullback from the highest level since 1992.
The market focus now shifts to the release of flash PMI prints on Wednesday, which will be looked upon for fresh insight into the global economic health. This, along with the broader risk sentiment, will influence demand for the safe-haven JPY and provide some meaningful impetus to the EUR/JPY cross.
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. Still, the Bank judges that the sustainable and stable achievement of the 2% target has not yet come in sight, so any sudden change in the current policy looks unlikely.
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