EUR/JPY is trading more weakly around 180.60 during the early European session on Friday. The Japanese yen (JPY) rose against the euro (EUR) amid growing speculation that the Bank of Japan (BoJ) will raise interest rates when it meets in December. The third estimate of the euro zone’s third-quarter GDP growth rate will be published later on Friday.
The Bank of Japan is said to be leaning toward raising interest rates at its December meeting, while keeping the option open for further tightening, Bloomberg reported on Friday, citing people familiar with the internal discussions. Bank of Japan Governor Kazuo Ueda said earlier on Monday that the Japanese central bank will consider the “pros and cons” of raising interest rates this month, indicating a strong chance of raising interest rates at the meeting on December 18-19. This will be the first increase since January.
Eurozone inflation rose unexpectedly in November, suggesting that further interest rate cuts by the European Central Bank are unlikely under current economic conditions. Heightened bets that the European Central Bank has finished cutting interest rates may support the euro against the Japanese yen.
These expectations were confirmed by European Central Bank President Christine Lagarde’s comment earlier this week, saying that the central bank expects inflation to remain close to its 2% target in the coming months. Meanwhile, European Central Bank policymaker Joachim Nagel said interest rates are currently in a “good place.” He added that the new forecasts in December will help determine whether the bank is on track to achieve its medium-term inflation target.
Frequently asked questions about the euro
The euro is the official currency of the twenty European Union countries that belong to the eurozone. It is the second most traded currency in the world after the US dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily trading volume of more than $2.2 trillion per day. The EUR/USD is the most widely traded currency pair in the world, accounting for a 30% discount on 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 euro area. The European Central Bank 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 to raise or lower interest rates. Relatively high interest rates – or the expectation of higher interest rates – usually benefit the euro and vice versa. The ECB’s Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by the heads of the eurozone’s national banks and the six permanent members, including the President of the European Central Bank, Christine Lagarde.
Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), is one of the important economic indicators for the euro. If inflation rises beyond expected, especially if it is above the ECB’s 2% target, this forces the ECB to raise interest rates to bring it back under control. Relatively high interest rates compared to their counterparts usually benefit the euro, because they make the region more attractive as a place for global investors to park their money.
Data releases measure the health of the economy and can affect the euro. Indicators such as GDP, manufacturing and services PMIs, employment, and consumer confidence 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, it may encourage the European Central Bank to raise interest rates, which will directly strengthen the euro. Otherwise, if economic data is weak, the euro will likely fall. Economic data for the four largest Eurozone economies (Germany, France, Italy and Spain) are of particular interest, as they represent 75% of the Eurozone economy.
Another important data 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 during a certain period. If a country produces highly desirable exports, its currency will gain value from the additional demand generated by foreign buyers seeking to purchase these goods. Therefore, a positive net trade balance strengthens the currency and vice versa for a negative balance.
