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Euro drifts away from 184.00 Yen despite hot German inflation figures

  • EUR/JPY pulls back to 183.50 after failure to find follow-through above 184.00.
  • Hot German inflation data adds to the case for an ECB rate hike in September.
  • A hawkish tone of the BoJ's summary of opinions has provided some support to the Yen this week.


The Euro (EUR) is paring previous gains against the Japanese Yen (JPY) on Wednesday, weighed by a mild risk-off market mood as tensions in the Middle East grow. EUR/JPY bulls have failed to find acceptance above 184.00, despite the hot German consumer inflation data seen earlier on the day, and the pair retreated to 1.8315 lows before returning to the 183.50 area at the time of writing.

Data from Germany released earlier on the day confirmed that July’s Harmonised Index of Consumer Prices (HICP) accelerated to a 2.8% year-over-year (Y-o-Y) rate, from 2.4% in June, as energy inflation jumped to 7.3% in the 12 months to July, from 2.7% in June. Excluding food and energy, inflation also accelerated, albeit at a more moderate 2.6% Y-o-Y rate, from June’s 2.5% reading.

These figures cement hopes for a European Central Bank (ECB) interest rate hike in September, although the impact on the Euro has been marginal.

The common currency is struggling against its main peers on  Wednesday as reports of attacks on vessels attempting to cross the Straits of Hormuz and Bab el-Mandeb have cast further doubt about the fate of the US-Iran peace process, pushing back hopes of a swift reopening of the Strait of Hormuz.

The Yen, on the other hand, is trimming losses across the board on Wednesday, following the release of a hawkishly leaning Summary of Opinions by the Bank of Japan (BoJ) earlier in the week. Analysts at DBS Group Research note that there are “growing reasons for the BoJ to bring forward its tightening cycle,” pointing to firm wage-driven reflation and strengthening CPI as key supports for earlier action. DBS experts add that “faster policy normalization may also be needed to address persistent JPY weakness,” underscoring how currency dynamics are increasingly feeding into the policy debate.

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

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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