Market Data 
- EUR/JPY recovers from 164.80 while the near-term outlook remains uncertain.
- The BoJ is expected to hike interest rates further next week.
- Euro’s near-term outlook has worsened due to multiple headwinds.
The EUR/JPY pair recovers its intraday losses after discovering strong buying interest near fresh two-month low of 164.80 in Thursday’s New York session. The cross rebounds sharply but the near-term outlook remains uncertain on expectations that the Bank of Japan (BoJ) could tighten its monetary policy further next week.
Lately, the Japanese Yen gained more than 6% in the past two weeks as traders unwind short positions significantly.
The BoJ is expected to raise interest rates further due to increasing price pressures. The inflationary pressures have risen due to weak Japanese Yen, which made exports competitive in the global market. Also, the BoJ is expected to tame bond-buying operations, a move to curtail liquidity stimulus.
In the old continent, the Euro’s outlook remains uncertain due to poor Eurozone economic outlook and growing speculation that the European Central Bank (ECB) will cut its key borrowing rates two time more this year.
Eurozone preliminary Composite PMI barely expanded in July, landed at 50.1. Investors expected the PMI to have expanded at a faster pace to 51.1 from the former release of 50.9. The Manufacturing PMI contracted to 45.6, while the Services PMI expanded at a slower pace to 51.9.
ECB officials see market expectations for two more rate cuts this year as appropriate amid confidence that inflation will return sustainably to 2% next year.
Japanese Yen FAQs
The Japanese Yen (JPY) is one of the world’s most traded currencies. Its value is broadly determined by the performance of the Japanese economy, but more specifically by the Bank of Japan’s policy, the differential between Japanese and US bond yields, or risk sentiment among traders, among other factors.
One of the Bank of Japan’s mandates is currency control, so its moves are key for the Yen. The BoJ has directly intervened in currency markets sometimes, generally to lower the value of the Yen, although it refrains from doing it often due to political concerns of its main trading partners. The current BoJ ultra-loose monetary policy, based on massive stimulus to the economy, has caused the Yen to depreciate against its main currency peers. This process has exacerbated more recently due to an increasing policy divergence between the Bank of Japan and other main central banks, which have opted to increase interest rates sharply to fight decades-high levels of inflation.
The BoJ’s stance of sticking to ultra-loose monetary policy has led to a widening policy divergence with other central banks, particularly with the US Federal Reserve. This supports a widening of the differential between the 10-year US and Japanese bonds, which favors the US Dollar against the Japanese Yen.
The Japanese Yen is often seen as a safe-haven investment. This means that in times of market stress, investors are more likely to put their money in the Japanese currency due to its supposed reliability and stability. Turbulent times are likely to strengthen the Yen’s value against other currencies seen as more risky to invest in.
