EUR/JPY Gains Traction in Early European Session
- EUR/JPY gains traction to around 160.70 in Tuesday’s early European session, up 0.49% on the day.
- Ishiba’s comments undermine the Japanese Yen.
- ECB’s Lagarde said she is increasingly confident that inflation will ease to its 2% target.
The EUR/JPY cross extends the rally to near 160.70 during the early European session on Tuesday. The remarks from Japan’s incoming Prime Minister (PM) Shigeru Ishiba weigh on the Japanese Yen (JPY). Investors await the Eurozone Harmonized Index of Consumer Prices (HICP) for September for fresh impetus. Also, the European Central Bank (ECB) policymakers Luis de Guindos and Isabel Schnabel are set to speak later on Tuesday.
Factors Impacting EUR/JPY Movement
- Japan’s incoming Prime Minister Shigeru Ishiba’s dovish comments affecting JPY.
- ECB President Lagarde’s confidence in easing inflation to 2% target.
- Expectations of a rate cut at the next ECB policy meeting due to softer German CPI data.
Shigeru Ishiba’s comments on the need for accommodative monetary policy from the Bank of Japan (BoJ) to support the fragile economic recovery put downward pressure on the JPY. Meanwhile, the Tankan Large Manufacturing Index in Japan shows steady business conditions for large manufacturing companies in Q3 of 2024.
On the Euro front, the anticipation of a 25 basis points rate cut at the upcoming ECB meeting in October following Lagarde’s remarks about falling inflation and a possible interest rate reduction may limit the Euro’s upside potential.
Understanding the European Central Bank (ECB)
ECB FAQs
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy for the region. The ECB primary mandate is to maintain price stability, which means keeping inflation at around 2%. Its primary tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.
In extreme situations, the European Central Bank can enact a policy tool called Quantitative Easing. QE is the process by which the ECB prints Euros and uses them to buy assets – usually government or corporate bonds – from banks and other financial institutions. QE usually results in a weaker Euro. QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The ECB used it during the Great Financial Crisis in 2009-11, in 2015 when inflation remained stubbornly low, as well as during the covid pandemic.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the European Central Bank (ECB) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the ECB stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Euro.