EUR/JPY rises above 172.00 as traders expect ECB to pause easing cycle
- EUR/JPY appreciates due to a cautious tone surrounding the ECB policy outlook.
- The Euro gains support from improved market sentiment fueled by hopes of a possible end to the Ukraine-Russia war.
- Traders remain uncertain regarding the Bank of Japan's interest rate hikes.
EUR/JPY extends its gains for the second successive session, trading around 172.10 during the Asian hours on Monday. The currency cross continues to gain ground as the Euro (EUR) receives support from the prevailing expectations of the European Central Bank (ECB) pausing its easing cycle in September.
Additionally, the Euro receives support from improved market sentiment due to the possibility of the Ukraine-Russia war coming to an end. News of a possible Trump-Putin meeting next week leads some to expect a deal that could halt hostilities in Ukraine.
On policy outlook, the European Central Bank (ECB) left its key rates unchanged at its last meeting, reflecting greater confidence that inflation is stabilizing near the 2% target. The Governing Council has reiterated its “meeting-by-meeting and data-dependent” stance, choosing to pause and assess the impact of global trade uncertainty and US tariffs on the eurozone economy.
The upside of the EUR/JPY cross could be limited as the Japanese Yen (JPY) gains ground amid mixed sentiment surrounding the Bank of Japan (BoJ) interest rate hikes. The BoJ Minutes for the July meeting showed that board members maintained their view that further interest rate increases remain appropriate, despite heightened uncertainty surrounding tariffs.
However, BoJ's Summary of Opinions showed last week that policymakers remain uncertain about the potential negative impact of higher US tariffs on the domestic economy, tempering expectations for an immediate rate hike.
Interest rates FAQs
Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%. If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.
Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.
Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank. If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.
The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure. Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.
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.
