EUR/JPY drops to near 159.50 as traders brace for ECB rate decision

• EUR/JPY loses traction to near 159.50 in Wednesday’s Asian session. 
• The Japanese PPI came in stronger than expected, boosting the JPY.
• The uncertainty over how soon the BoJ could raise rates might cap the downside for the cross.

The EUR/JPY cross attracts some sellers to around 159.50 during the early European session. The Japanese Yen (JPY) strengthens against the Euro (EUR) after the stronger-than-expected Japanese Producer Price Index (PPI) for November. The European Central Bank (ECB) interest rate decision will be in the spotlight on Thursday. 

The preliminary reading by the Bank of Japan (BoJ) showed on Wednesday that the country’s Producer Price Index (PPI) increased by 0.3% MoM in November, better than the 0.2% expected. On an annual basis, the PPI rose by 3.7% YoY during the same reported period, above the market consensus of 3.4%. 
 
Furthermore, the expectation that the ECB will implement aggressive interest rate cuts to prop up the faltering regional economy could weigh on the shared currency. The ECB is widely expected to cut the deposit facility by another 0.25% to 3.00%. This expectation aligns with the ECB’s strategy to guide inflation toward its 2% target against a backdrop of weaker economic growth in the Eurozone.

Nonetheless, the dovish remarks from the Japanese authorities might undermine the JPY and cap the downside for the cross. BoJ’s board member Toyoaki Nakamura said last week that the central bank must move cautiously in raising rates, fueling uncertainty about the BoJ’s December policy decision.

ECB FAQs

What is the ECB and how does it influence the Euro?

The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy for the region. The ECB primary mandate is to maintain price stability, which means keeping inflation at around 2%. Its primary tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger 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.

What is Quantitative Easing (QE) and how does it affect the Euro?

In extreme situations, the European Central Bank can enact a policy tool called Quantitative Easing. QE is the process by which the ECB prints Euros and uses them to buy assets – usually government or corporate bonds – from banks and other financial institutions. QE usually results in a weaker Euro. QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The ECB used it during the Great Financial Crisis in 2009-11, in 2015 when inflation remained stubbornly low, as well as during the covid pandemic.

What is Quantitative tightening (QT) and how does it affect the Euro?

Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the European Central Bank (ECB) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the ECB stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Euro.

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