EUR/JPY depreciates after two days of gains, trading around 181.40 during the Asian hours on Tuesday. The currency cross loses ground as the Japanese Yen (JPY) strengthens amid rising speculation that the Bank of Japan (BoJ) could deliver an earlier-than-expected rate hike. Investors now look ahead to Germany’s January Harmonized Index of Consumer Prices (HICP) and February ZEW Survey data due later in the day.
Former Bank of Japan board member Seiji Adachi says the central bank is likely to raise its key interest rate in April as more data becomes available to support the move. Additionally, BoJ Governor Kazuo Ueda added that Prime Minister Sanae Takaichi made no specific policy requests during their regular meeting, which focused on economic conditions.
However, the JPY faced pressure after Monday’s Japanese Gross Domestic Product (GDP) data showed the economy grew 0.1% quarter-over-quarter (QoQ) in Q4, rebounding from a 0.7% contraction in Q3 but missing forecasts for a 0.4% increase. On an annualized basis, Japan’s economy expanded 0.2%, compared with forecasts of 1.6% and the third quarter’s 2.6% decline (revised from 2.3% decline).
Meanwhile, downside in the EUR/JPY cross could be limited as the Euro (EUR) may draw further support after the European Central Bank (ECB) announced it will broaden access to its EUR liquidity backstop for central banks worldwide, aiming to strengthen the single currency’s global standing. At February’s meeting, ECB President Christine Lagarde said the euro area inflation outlook is in a “good place,” while warning against overreacting to short-term volatility.
The Euro also drew support from reports that François Villeroy de Galhau, Governor of the Bank of France and considered dovish, will step down in June, ahead of his term’s scheduled end in October 2027.
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.
Source: https://www.fxstreet.com/news/eur-jpy-falls-below-18150-ahead-of-german-hicp-zew-survey-data-202602170347
