The EUR/JPY cross kicks off the new week on a positive note, albeit struggles to capitalize on its intraday move up and remains below the 162.00 mark through the Asian session. Moreover, the fundamental backdrop suggests that the path of least resistance for spot prices is to the downside. 

Investors now seem convinced that increased domestic political uncertainty in Japan could restrict the Bank of Japan (BoJ) from hiking interest rates further. This, along with the prevalent risk-on environment, is seen undermining demand for the safe-haven Japanese Yen (JPY) and lending some support to the EUR/JPY cross. That said, intervention fears and retreating US Treasury bond yields help limit losses for the lower-yielding JPY.

The shared currency, on the other hand, seems vulnerable on the back of a surprise fall in the Eurozone Composite PMI to a 10-month low in November. This comes on top of potential economic risks in the wake of US President-elect Donald Trump's taunted tariffs and lifts bets for faster interest rate cuts from the European Central Bank (ECB). This, in turn, favors the Euro bears and validates the negative outlook for the EUR/JPY cross. 

Even from a technical perspective, the recent repeated failures near the 200-period Simple Moving Average (SMA) on the 4-hour chart favor bearish traders. Adding to this, negative oscillators on daily/hourly charts suggest that any intraday move-up could be seen as a selling opportunity and runs the risk of fizzling out quickly. Investors, however, might wait for acceptance below the 161.00 mark before positioning for any intraday decline.

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.

Source: FXSTREET

[Quick Facts]

[News Details]

[Today's Focus]

The Japanese Yen (JPY) strengthens against its American counterpart at the start of a new week, dragging the USD/JPY pair back below the 154.00 mark during the Asian session. The US Treasury bond yields fell sharply in reaction to Scott Bessent's nomination as US Treasury Secretary. This, in turn, prompts traders to lighten their US Dollar (USD) bullish bets after the recent rally to a two-year high and drives some flows towards the lower-yielding JPY. 

That said, the uncertainty tied to the Bank of Japan's (BoJ) rate-hike plans, along with the prevalent risk-on environment, could cap any meaningful appreciating move for the safe-haven JPY. Moreover, expectations that US President-elect Donald Trump's policies could reignite inflation and restrict the Federal Reserve (Fed) to cut interest rates slowly might act as a tailwind for the US bond yields. This, in turn, favors the USD bulls and should offer support to the USD/JPY pair. 

Japanese Yen benefits from retreating US bond yields and a weaker US Dollar

US President-elect Donald Trump nominated prominent investor Scott Bessent – a fiscal conservative – as Treasury Secretary, reassuring the bond market and pulling yields lower across the board. 

The US Dollar, having risen for eight weeks in a row, retreats from its highest level since November 2022 as traders opt to take some profits off the table following the post-US election blowout rally.

Despite stronger consumer inflation data from Japan and Bank of Japan Governor Kazuo Ueda's hawkish remarks, domestic political uncertainty could restrict the BoJ from tightening its monetary policy. 

Meanwhile, investors have been scaling back their bets for another 25-basis-points rate cut by the Federal Reserve in December amid worries that Trump's policies could boost inflationary pressures. 

According to CME Group's FedWatch Tool, traders are pricing in just over a 55% probability that the Fed will lower borrowing costs next month and a nearly 45% chance for an on-hold decision. 

The optimism over more business-friendly policies from the new Trump administration was reinforced by the flash US PMIs, showing that business activity climbed to a 31-month high in November.

S&P Global reported on Friday that the Composite US PMI rose to 55.3 this month, or the highest level since April 2022, suggesting that economic growth probably accelerated in the fourth quarter. 

Reports suggest that a ceasefire deal between Israel and the Lebanese militant group Hezbollah is very close, which further fuels the risk-on mood and might cap the upside for the safe-haven JPY. 

The focus this week will be squarely on the US Personal Consumption and Expenditure (PCE) Price Index data, which could offer cues on the Fed's interest rate path and provide a fresh impetus. 

USD/JPY finds acceptance below 100-period SMA on 4-hour chart; seems vulnerable

From a technical perspective, acceptance below the 100-period Simple Moving Average (SMA) now seems to have set the stage for a further depreciating move for the USD/JPY pair. That said, any further slide might continue to find some support near the 153.30-153.25 region. This is followed by the 153.00 round figure, which if broken decisively will be seen as a fresh trigger for bearish traders and pave the way for deeper losses. Spot prices might then accelerate the fall towards the next relevant support near mid-152.00s en route to the very important 200-day SMA, currently pegged near the 152.00 mark.

On the flip side, the 154.00 round figure now seems to act as an immediate hurdle ahead of the Asian session top, around the 154.40 region. Some follow-through buying should allow the USD/JPY pair to reclaim the 155.00 psychological mark and climb further towards the 155.40-155.50 supply zone. A sustained strength beyond the latter should pave the way for a move beyond the 156.00 mark, towards retesting the multi-month top, around the 156.75 region touched on November 15.

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 BoJ ultra-loose monetary policy between 2013 and 2024 caused the Yen to depreciate against its main currency peers due to an increasing policy divergence between the Bank of Japan and other main central banks. More recently, the gradually unwinding of this ultra-loose policy has given some support to the Yen.

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

Over the last decade, 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 supported a widening of the differential between the 10-year US and Japanese bonds, which favored the US Dollar against the Japanese Yen. The BoJ decision in 2024 to gradually abandon the ultra-loose policy, coupled with interest-rate cuts in other major central banks, is narrowing this differential.

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.

Source: FXSTREET

RBNZ set for third rate cut 

The Reserve Bank of New Zealand will kick-start the end of year policy meetings of the major central banks when it announces its decision on Wednesday. Having stood out as being ultra-hawkish during the global tightening cycle, the RBNZ performed a major policy reversal over the summer by embarking on a loosening campaign even before the Fed had started its own.

With the annual rate of CPI falling within its 1-3% target band, inflation expectations settling around 2.0% and GDP growth remaining sluggish, policymakers have little reason to be cautious and a back-to-back 50-basis point cut is fully priced in. There is even speculation that the RBNZ might opt for a triple reduction of 75 basis points, which can be justified by the fact that, after November, policymakers won’t meet again until February.

Should the RBNZ surprise with a hefty cut, it will be difficult for the New Zealand dollar to regain its footing against the US dollar, and it could tumble to fresh 2024 lows.

Storm of US data before Thanksgiving break

The US economic agenda will get back into full gear next week as a flurry of releases are on the way before traders abandon their desks for the Thanksgiving holiday. Politics briefly eclipsed monetary policy after Donald Trump’s shock election win. But the focus is primarily back on the Fed now amid growing doubts about how many times the US central bank will be able to cut rates even before the incoming administration’s inflationary policies have seen the light of day.

Expectations of a 25-bps reduction in December currently stand at between 60% and 55% as Fed officials have turned more hawkish after a string of upbeat indicators on the economy, but more importantly, after the decline in underlying inflation stalled again.

Fed Char Powell has joined the FOMC’s hawkish camp, flagging the possibility of a pause. Hence, the likelihood of a cut will depend on how strong or weak the next inflation and jobs reports are before the December meeting.

The PCE inflation report, out on Wednesday, is up first on the schedule. Powell recently said he sees core PCE edging up from 2.7% to 2.8% in October, which would mark a setback for the Fed. The projection for headline PCE is a pickup from 2.1% to 2.3%.

Both the headline measures of PCE and CPI inflation have maintained a clearer downward path than the core readings, and if the incoming numbers do not throw this trend into question, the Fed might still have some manoeuvrability to trim rates in December.

Fed minutes also in the spotlight

Should the PCE price indices fail to shed any light on the Fed’s next move, investors will look to the minutes of the Fed’s November policy meeting due the same day for fresh policy insight. There will also be plenty of other data to sift through on Wednesday. Personal income and consumption will be quite important, followed by durable goods orders for October and the second estimate of Q3 GDP growth.

A day earlier, new home sales and the Conference Board’s consumer confidence gauge are likely to attract some attention too. US markets will be shut on Thursday for Thanksgiving Day and the stock market will close early on Friday, which means there will only be light trading. Nevertheless, those choosing not to make a weekend of it will have the Chicago PMI to keep them entertained.

The US dollar has been extending its post-election rally over the past week. But its gains are now looking overstretched. Any disappointing data therefore risks triggering a sharp correction.

Eurozone CPI eyed for ECB clues

Despite rising pessimism about the European growth outlook, ECB policymakers have been pushing back on investor expectations of a 50-bps rate cut in December. The recent jump in negotiated wages – a key metric for the ECB – and services inflation continuing to hover around 4% underline policymakers’ concerns about cutting too fast.

Markets have assigned about a 25% probability for a 50-bps move in December, which may be overstating the true odds if the latest ECB rhetoric is to be believed. This implies there’s quite a mountain to climb to push the chances for a 50-bps cut substantially higher.

Nevertheless, Friday’s flash CPI figures will be watched closely. In October, headline CPI accelerated from 1.7% to 2.0%. A further increase to 2.4% is forecast for November, which could dash hopes for a larger cut even more, potentially helping the euro to stop the recent bleeding against the greenback.

Ahead of the CPI numbers, Monday’s Ifo business survey out of Germany will be on investors’ radar amid worries about how the political uncertainty in the country is affecting business confidence.

Will CPI data worsen the aussie’s pain?

In Australia, the latest CPI stats will also be doing the rounds. The monthly readings for October are due on Wednesday, while on Thursday, Q3 capital expenditure data will be monitored. Annual inflation fell to 2.1% in September, which is at the lower end of the RBA’s 2-3% target band. Yet, the RBA is not ready to start taking its foot off the brake, and investors don’t foresee a rate cut before May 2025 at the earliest.

If CPI edges up to 2.3% in October as expected, there might be some support for the Australian dollar versus its stronger US counterpart.

Loonie turns attention to Canadian GDP

Another currency struggling to keep its head above water is the Canadian dollar. The Bank of Canada has been more aggressive than other central banks in slashing rates, and this explains why the loonie is the third worst performing major currency this year.

A fifth consecutive rate cut is likely in December but bets for a second 50-bps cut faded after the recent hotter-than-expected CPI report. Friday’s Q3 GDP print will probably not be a game changer for the BoC, but there could still be a sizeable reaction in the loonie from any big surprises.

Tokyo inflation on tap

Adding to Friday’s data barrage are the Tokyo CPI figures for November. Inflation in Tokyo fell below the Bank of Japan’s 2.0% target in October, but this hasn’t dissuaded policymakers from wanting to raise interest rates further. The question now is more about the timing. With investors split 50-50 about the possibility of a rate increase in December, stronger-than-forecast numbers could bolster bets for a year-end hike, lifting the yen.

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