- EUR/JPY heads toward 164.00 as demand for the safe-haven Yen weakens.
- Inflation data out of the Eurozone misses estimates ahead of Thursday’s ECB rate decision, with a 25-basis-point rate cut already priced into the Euro.
- Bank of Japan (BoJ) remains committed to maintaining a careful balance between interest rates and economic growth, limiting the Yen’s gains.
The Euro (EUR) has been gaining strength against the Japanese Yen (JPY), traditionally seen as a safe haven, on Tuesday.
At the time of writing, EUR/JPY is trading above the 20-day Simple Moving Average (SMA) support level of 163.31, with resistance firming at 164.00.
This follows the release of Eurozone inflation data, which was softer than anticipated, and cautious signals from the Bank of Japan’s (BoJ) Governor regarding future interest rate expectations.
On Tuesday, the preliminary Core Harmonized Index of Consumer Prices (HICP) for the Eurozone indicated continued easing for May. The core HICP rose by 2.3% YoY, down from 2.7% in April and beneath the forecasted 2.5% increase.
As inflation trends closer to the European Central Bank’s (ECB) target of 2%, the ECB appears poised to consider a rate cut during its monetary policy meeting on Thursday. Analysts are factoring in the likelihood of a 25-basis-point (bps) rate cut before solidifying their outlook for interest rates for the rest of the year.
During the Asian trading session, BoJ Governor Kazuo Ueda addressed market participants, maintaining a hawkish position and hinting at possible interest rate hikes in response to rising inflation. According to Reuters, he stated that the “BoJ anticipates continuing to raise rates if underlying inflation reaches the projected 2%.” However, he also emphasized that tariffs and trade disputes could pose risks to the economic outlook, highlighting the need for a careful balance between monetary policy and economic growth.
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it.
Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.