EUR/JPY flattens around 163.40, investors seek fresh cues on US-EU trade talks
- EUR/JPY trades sideways around 163.40 as investors seek further development in US-EU trade discussions.
- Soft France CPI data for May paves the way for an interest rate cut by the ECB in June.
- The Japanese Yen capitalizes on a sharp increase in government bond yields.
The EUR/JPY pair trades flat around 163.40 during North American trading hours on Wednesday. The cross consolidates as the Euro (EU) wobbles, with investors looking for fresh cues about the current status of trade talks between the United States (US) and the European Union (EU).
On Tuesday, US President Donald Trump signaled quick attempts from the EU to conduct trade talks with Washington. I have just been informed that the EU has called to quickly establish meeting dates. This is a positive event, and I hope that they will," Trump wrote in a post on Truth.Social.
This comes as a positive trigger for global trade tensions as giant economies have agreed to reach a trade deal. Another reason behind the Euro's sideways performance is anxiety among investors ahead of the inflation data from key nations of the Eurozone, such as Germany, Spain, and Italy on Friday.
Meanwhile, preliminary France Consumer Price Index (CPI) (EU norm) data for May has shown that inflationary pressures have cooled down. Year-on-year CPI rose at a slower pace of 0.6%, compared to a 0.9% growth seen in April. Soft inflation data has encouraged European Central Bank (ECB) officials to support reducing interest rates again in the June policy meeting.
ECB policymaker and French central bank chief François Villeroy de Galhau mentioned in a speech on Tuesday that the 0.6% inflation rate in France is a “very encouraging sign of disinflation in action”. Villeroy guided a dovish stance on the interest rate outlook stating that the “policy normalization in the Euro area is probably not complete”.
On the Tokyo front, the Japanese Yen (JPY) gains following a significant jump in bond yields. 10-year JGB yields surge by 3% to near 1.52% after Japan’s Ministry of Finance signaled that it will consider tweaking the composition of its bond program, which could involve cuts to its super-long bond issuance, Reuters reported.
Euro FAQs
The Euro is the currency for the 19 European Union countries that belong to the Eurozone. It is the second most heavily traded currency in the world behind the US Dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily turnover of over $2.2 trillion a day. EUR/USD is the most heavily traded currency pair in the world, accounting for an estimated 30% off 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 Eurozone. The ECB 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 the raising or lowering of interest rates. Relatively high interest rates – or the expectation of higher rates – will usually benefit the Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.
Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), is an important econometric for the Euro. If inflation rises more than expected, especially if above the ECB’s 2% target, it obliges the ECB to raise interest rates to bring it back under control. Relatively high interest rates compared to its counterparts will usually benefit the Euro, as it makes the region more attractive as a place for global investors to park their money.
Data releases gauge the health of the economy and can impact on the Euro. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment 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 but it may encourage the ECB to put up interest rates, which will directly strengthen the Euro. Otherwise, if economic data is weak, the Euro is likely to fall. Economic data for the four largest economies in the euro area (Germany, France, Italy and Spain) are especially significant, as they account for 75% of the Eurozone’s economy.
Another significant data release 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 over a given period. If a country produces highly sought after exports then its currency will gain in value purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.