- EUR/JPY gained momentum around the 173.80 level in Wednesday's European session, up 0.20% from the previous day.
- Japanese business activity began to contract in June, putting pressure on the yen.
- The interest rate differential between the eurozone and Japan will continue to support the euro for the time being.
In early European session on Wednesday, the EUR/JPY cross was trading in positive territory for a sixth consecutive day around the 173.80 level. The Japanese Yen (JPY) fell after data showed that business activity in Japan started to contract in June.
Japan's final services PMI reading fell to 49.4 in June from 49.8 in May. This marked the biggest drop since January 2022 and one of the largest on record, putting selling pressure on the yen and acting as a headwind for the yen/dollar. Meanwhile, possible Bank of Japan (BoJ) intervention in foreign exchange (FX) could support the yen in the short term.
In the euro zone, the flash euro zone consumer price index (HICP) fell to 2.5% year-on-year in June, down from 2.6% in May. But these inflation reports are unlikely to trigger the ECB to cut interest rates again at its next policy meeting on July 18. “There is nothing in these figures that would justify the ECB cutting rates again in July, and the ECB will likely await data eagerly over the summer before seriously discussing the next rate cut in September,” said Bert Collin, senior euro zone economist at Dutch bank ING.
European Central Bank President Christine Lagarde said on Monday that recent economic developments suggest further interest rate cuts are not urgent. Divergences in monetary policy between the euro zone and Japan are continuing to support the euro for the time being.
Frequently asked questions about the Japanese Yen
The Japanese Yen (JPY) is one of the most traded currencies in the world. Its value is determined broadly by the performance of the Japanese economy, but more specifically by factors such as the Bank of Japan's policies, the spread between Japanese and US bond yields, and traders' risk sentiment.
The Bank of Japan's movements are important for the yen, since one of its mandates is currency management. The BOJ would typically intervene directly in the currency market to weaken the yen, but often refrains from doing so due to political concerns with major trading partners. The BOJ's current ultra-loose monetary policy, based on a massive economic stimulus package, has caused the yen to weaken against major currencies. This process has worsened in recent days due to growing divergence between the BOJ and other major central banks, which have chosen to significantly raise interest rates to combat the highest inflation levels in decades.
The Bank of Japan's insistence on ultra-loose monetary policy has led to a growing divergence in policy with other central banks, particularly the U.S. Federal Reserve, which has helped to widen the gap between 10-year U.S. Treasury bonds and Japanese government bonds, giving the U.S. dollar an edge over the Japanese yen.
The Japanese Yen is often seen as a safe investment, meaning that during times of market turmoil, investors are more likely to put their money into the Japanese Yen due to its reliability and stability. In times of volatility, the yen tends to rise in value against other currencies that are considered riskier investments.
