- EUR/JPY maintains its position as the BoJ’s Summary of Opinions indicated to keep interest rates steady.
- The pair may appreciate due to dampened safe-haven demand following the Israel-Iran ceasefire.
- ECB’s Francois Villeroy de Galhau noted that the central bank may cut interest rates despite the volatile Oil market.
EUR/JPY steadies after registering over 0.50% losses in the previous session, trading around 168.30 during the Asian hours on Wednesday. The Japanese Yen (JPY) moves little against its peers following the release of the Summary of Opinions from the Bank of Japan’s (BoJ) June meeting.
The BoJ’s summary showed that some policymakers called for keeping interest rates steady for the time being due to uncertainty over the impact of US tariffs on Japan’s economy. Many members indicated that the effects of US tariff policies are yet to materialize, and the impact will certainly exert downward pressure on firms’ sentiment.
Latest data showed that Japan’s core inflation climbed to a more than two-year high in May and remained above the central bank’s 2% target. Additionally, the better-than-expected Japan’s PMI keeps the door open for further rate hikes by the BoJ in the coming month.
The risk-sensitive EUR/JPY cross may gain ground due to improved risk appetite, driven by the easing tensions in the Middle East. On Tuesday, US President Donald Trump announced that a ceasefire between Iran and Israel was in place, raising hopes for an end to the 12-day conflict.
However, caution lingered amid uncertainty over the ceasefire’s durability. A US intelligence report indicated that US strikes on Iranian nuclear sites have set back Tehran’s program by only a matter of months, per Reuters. Additionally, Iranian Foreign Minister Abbas Araghchi said that the country’s nuclear program continues, per the local news agency Al Arabiya.
European Central Bank (ECB) policymaker Francois Villeroy de Galhau told the Financial Times on Tuesday that the central bank could still cut interest rates despite the volatility seen in the Oil market. Meanwhile, ECB chief economist Philip Lane said that “Our monetary policy will have to take into account not only the most likely path (the baseline) but also the risks to activity and inflation,” per Reuters.
Interest rates FAQs
Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%. If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.
Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.
Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank. If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.
The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure. Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.
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