EUR/JPY edged tantalizingly close to the 168.00 mark on Monday, marking its sixth consecutive day of gains, as traders exhibit a strong preference for the Euro over the Japanese Yen. This preference stems from the substantial interest-rate differential between the Eurozone and Japan, favoring the Euro’s appeal to investors.
With interest rates in Europe notably higher at 4.5% compared to Japan’s modest range of 0.0% to 0.1%, the Euro garners increased capital inflows, amplifying demand and propelling gains for EUR/JPY.
Despite mounting expectations of an impending interest rate cut by the European Central Bank (ECB) in June, juxtaposed with the likelihood of interest rate hikes by the Bank of Japan (BoJ) before the end of 2024, the short-term uptrend in EUR/JPY persists. Recent data from Japan revealing sluggish wage growth and inflation has tempered expectations for rate hikes in Japan, dampening the performance of the Yen.
In contrast, the Euro received a boost following the release of first-quarter GDP data, unveiling a surprising 0.3% increase in Eurozone GDP growth rate. This robust growth rate, the highest since the third quarter of 2022, surpassed market projections and follows a string of lackluster readings indicating tepid growth across the continent.
However, EUR/JPY briefly dipped to a low of 167.50 early on Monday after the BoJ scaled back its latest round of quantitative easing (QE), reducing purchases of 5-10 year Japanese government bonds from 475 billion Yen to 425 billion Yen. This reduction in bond buying is perceived as a tightening policy akin to interest rate hikes, typically bolstering the currency.
Moreover, influential members of Japan’s ruling party, including Katsunobu Kato, signaled conducive conditions for the BoJ to normalize monetary policy by raising rates. Kato emphasized the necessity for vigilant monitoring of economic conditions and careful coordination with the government to determine the opportune moment for rate adjustments, as highlighted by Lallalit Srijandorn, FX Analyst at FXStreet.
