EUR/JPY attracts some sellers below 161.00 as BoJ's Ueda hawkish remarks boost the Japanese Yen

• EUR/JPY trades softer near 160.70 in Monday’s early European session, down 0.50% on the day. 

• BoJ’s hawkish remarks support the JPY and cap the upside for the cross.

• ECB’s Rehn said disinflation and a weak economy support the case for a September rate cut. 

The EUR/JPY cross trades in negative territory around 160.70 during the early European session on Monday. The hawkish comments from the Bank of Japan (BoJ) Governor Kazuo Ueda provide some support to the Japanese Yen (JPY) and weigh on the cross. The Eurozone's flash Harmonized Index of Consumer Prices (HICP) for August will take centre stage on Friday. 

The BoJ Governor Kazuo Ueda on Friday reaffirmed his resolve to raise interest rates if inflation stayed on course to sustainably hit the 2% target. A majority of economists expect the Japanese central bank to hike rates again this year, but more see the possibility of it occurring in December rather than October, according to the Reuters poll. The growing speculation of more rate hikes from the BoJ boosts the JPY against the Euro (EUR). 

On the Euro front, investors await its first estimate of inflation data for August, which might offer some hints about the European Central Bank (ECB) interest rate decision in September. Consensus suggests that inflation will cool down to 2.3% YoY in August, prompting expectations for the ECB to continue cutting interest rates for the remainder of the year. This, in turn, exerts some selling pressure on the shared currency. 

The ECB Governing Council member Olli Rehn said on Friday that the slowdown in inflation alongside weakness in the Eurozone economy strengthened arguments for cutting the borrowing costs next month. 

Japanese Yen FAQs

What key factors drive the Japanese Yen?

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.

How do the decisions of the Bank of Japan impact the Japanese Yen?

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.

How does the differential between Japanese and US bond yields impact the Japanese Yen?

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.

How does broader risk sentiment impact 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.