EUR/JPY gathers strength above 156.50 ahead of Eurozone HICP inflation data

• EUR/JPY drifts higher to 156.65 in Monday’s early Asian session, up 0.33% on the day, 
• Rising expectations that BoJ will raise interest rates further continue to lift the Japanese Yen. 
• Investors brace for the preliminary reading of the Eurozone HICP and the US ISM Manufacturing PMI report. 

The EUR/JPY cross edges higher to 156.65 during the Asian trading hours on Monday. The Euro (EUR) attracts some buyers after the report that France and the UK proposed a one-month Ukraine truce. Traders await the preliminary reading of the Eurozone Harmonized Index of Consumer Prices  (HICP) in February and the US ISM Manufacturing PMI, which are due later on Monday. 

Late Sunday, French President Emmanuel Macron said that France and Britain are proposing a one-month truce in Ukraine to stop all air and sea conflict and attacks on energy infrastructure. This action came after the crisis discussions in London, when European leaders pledged to spend more on security and assemble a coalition to defend any truce in Ukraine. 

On the other hand, the recent Japanese data showed solid economic growth and sticky inflation, which reaffirmed bets that the Bank of Japan (BoJ) will hike rates further and continue to lend support to the Japanese Yen. (JPY) The Jibun Bank Japan Manufacturing Purchasing Managers’ Index (PMI) came in at 50.8 in February versus a 48.9 flash reading and marking the softest contraction in three months.

Euro FAQs

What is the Euro?

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%).

What is the ECB and how does it impact 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. 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.

How does inflation data impact the value of the Euro?

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.

How does economic data influence the value of the Euro?

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.

How does the Trade Balance impact the Euro?

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.

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