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EUR/JPY tests the previous high at 164.90 after rejection at 166.00

  • The Euro pulls back from post-election highs as the Yen recovers.
  • The political uncertainty in Japan puts BoJ tightening plans into question and will weigh on the Yen.
  • Later this week, Eurozone GDP and CPI data might boost hopes of a large ECB cut and add pressure on the Euro.


The Euro has failed to find acceptance above 166.00 earlier today and has given away gains. The Yen has trimmed losses as the market digests the results of Japan´s elections and the pair has retreated to rest support at last week’s high, at 194.90.

The Yen dropped across the board during the early Asian season on Monday, weighed by the defeat of the ruling coalition in the Japanese elections. The hung parliament coming out of the elections opens an uncertain period in the world’s fourth-largest economy, leaving support for the BoJ’s monetary tightening plans in the air.

The Bank of Japan is meeting this week and, in the current context, they are widely expected to leave interest rates unchanged. This is likely to keep Yen's recovery limited.

The Euro, however, has weaknesses of its own. German GDP is expected to have contracted for the second consecutive quarter, weighing on the region’s growth.

If these figures are confirmed and are accompanied by a weak inflation reading speculation about a large ECB cut in December will increase, bringing the Euro lower across the board. 

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

Guillermo Alcala

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.

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