EUR/JPY falls to near 158.50 due to hawkish tone surrounding BoJ’s policy outlook

• EUR/JPY depreciates as expectations grow that the BoJ will raise interest rates to tackle persistent inflation.
• Japan’s trade deficit increased to JPY 2,758.78 billion in January as annual imports surged to a 26-month high.
• The Euro remains subdued due to rising odds of more ECB’s interest rate cuts.

EUR/JPY offers its gains from the previous session, trading around 158.50 during the European hours on Wednesday. The EUR/JPY cross weakens as the Japanese Yen (JPY) gains traction amid growing expectations that the Bank of Japan (BoJ) will continue raising interest rates to combat persistent inflation.

However, the JPY’s upside may be capped due to weaker-than-expected economic data. Japan’s core Machinery Orders—excluding ships and electric power—fell 1.2% month-on-month in December 2024, marking the steepest decline in four months and reversing November’s 3.4% growth. The reading also defied market projections for a modest 0.1% gain.

Japan’s trade deficit widened sharply to JPY 2,758.78 billion in January from JPY 1,766.54 billion a year earlier, exceeding market estimates of JPY 2,100 billion. Imports surged 16.7% YoY to a 26-month high, significantly outpacing December’s 1.7% growth and surpassing forecasts of 9.7%. Exports, however, expanded at a slower 7.2% YoY, marking the fourth consecutive month of growth but missing expectations of 7.9%.

The Euro is under pressure as sluggish growth in the Eurozone fuels expectations of further interest rate cuts by the European Central Bank (ECB). Analysts predict the ECB will implement quarter-point reductions at each meeting until mid-2025, bringing the deposit rate down to 2.0%.

On Wednesday, ECB policymaker Fabio Panetta acknowledged that economic weakness in the Eurozone is proving more persistent than expected. "We anticipated a recovery driven by consumer spending, but that has not materialized," he stated.

Interest rates FAQs

What are interest rates?

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.

How do interest rates impact currencies?

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.

How do interest rates influence the price of Gold?

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.

What is the Fed Funds rate?

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.