Euro holds losses against Japanese Yen as Eurozone inflation cools
- EUR/JPY remains weak as Eurozone HICP inflation slowed faster than expected to 2.8% in June.
- Eurozone inflation cooled faster than expected, lowering odds of prolonged high ECB rates.
- Japan’s Atsushi Mimura deemed its past currency intervention successful, adding that some US authorities voiced support.
EUR/JPY halts its four-day winning streak, trading around 185.40 during the European hours on Wednesday. The currency cross holds losses as the Euro (EUR) remains subdued following the release of the Eurozone’s preliminary Harmonized Index of Consumer Prices (HICP) data.
On Wednesday, Eurostat showed that Eurozone HICP inflation is at 2.8% Year-on-Year (YoY) in June, lower than estimates of 3% and the previous reading of 3.2%. On a monthly basis, the inflation data declined by 0.1% after rising at a similar pace in May.
Inflation cools faster than expected in the Eurozone, including Germany, France, and Italy, lowering the odds that the ECB will keep interest rates high. In Germany, June's inflation dropped to 2.3% from May's 2.6%, coming in below the 2.5% rate markets had anticipated.
The EUR/JPY cross could further depreciate as the Japanese Yen (JPY) may receive support from growing speculation that the government could intervene to defend the currency. Atsushi Mimura, Japan’s Vice Finance Minister for International Affairs and top foreign exchange official, stated that a previous intervention two months ago was successful, noting that some US authorities even voiced support for the move.
Further boosting the Yen, the Bank of Japan’s (BoJ) Q2 Tankan survey showed that business sentiment surged significantly past market forecasts. The Tankan Large Manufacturing Index climbed to 22 from the previous reading of 17, easily beating the market expectation of 16. Similarly, the Tankan Non-Manufacturing Index edged up to 37 from 36 prior, outperforming the market consensus of 35. This combination of robust economic data and active intervention fears could give the JPY notable upward momentum.
Euro FAQs
The Euro is the currency for the 20 European Union countries that belong to the Eurozone. It is the second most heavily traded currency in the world behind the US Dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily turnover of over $2.2 trillion a day. EUR/USD is the most heavily traded currency pair in the world, accounting for an estimated 30% off all transactions, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy. The ECB’s primary mandate is to maintain price stability, which means either controlling inflation or stimulating growth. Its primary tool is the raising or lowering of interest rates. Relatively high interest rates – or the expectation of higher rates – will usually benefit the 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.
Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), is an important econometric for the Euro. If inflation rises more than expected, especially if above the ECB’s 2% target, it obliges the ECB to raise interest rates to bring it back under control. Relatively high interest rates compared to its counterparts will usually benefit the Euro, as it makes the region more attractive as a place for global investors to park their money.
Data releases gauge the health of the economy and can impact on the Euro. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the single currency. A strong economy is good for the Euro. Not only does it attract more foreign investment but it may encourage the ECB to put up interest rates, which will directly strengthen the Euro. Otherwise, if economic data is weak, the Euro is likely to fall. Economic data for the four largest economies in the euro area (Germany, France, Italy and Spain) are especially significant, as they account for 75% of the Eurozone’s economy.
Another significant data release for the Euro is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought after exports then its currency will gain in value purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.