• EUR/JPY loses ground as the Japanese Yen advances amid the increased likelihood of further BoJ’s rate hikes.
  • Japanese Minister Ryosei Akazawa stated that authorities will take appropriate action regarding US reciprocal tariffs.
  • Eurozone GDP may remain consistent at 0.9% growth YoY in Q4, as expected.

EUR/JPY continues to lose ground for the second successive session, trading around 159.60 during the Asian hours on Friday. The currency cross depreciates as the Japanese Yen (JPY) continues to gain support following Thursday’s release of stronger-than-expected Producer Price Index (PPI) data from Japan, reinforcing expectations of further rate hikes by the Bank of Japan (BoJ).

Japan's Producer Price Index climbed 4.2% year-over-year in January 2025, up from a revised 3.9% in December and exceeding market forecasts of 4.0%. This marks the 47th consecutive month of producer inflation and the highest level since May 2023. The data underscores growing inflationary pressures in Japan, reinforced by recent wage growth figures, bolstering the case for further Bank of Japan rate hikes.

Additionally, the hawkish stance on the Bank of Japan’s (BoJ) monetary policy also continued to support the JPY. While there is uncertainty regarding whether the BoJ will raise interest rates again in March, the central bank is widely expected to implement further rate hikes later this year.

On Friday, Japan's Economy Minister Ryosei Akazawa stated that the authorities will respond appropriately to US reciprocal tariffs. Akazawa further stated that the weak Japanese Yen (JPY) has a variety of impacts on Japan's real economy.

The Euro could face potential headwinds as European Central Bank (ECB) policymaker Boris Vujčić indicated on Thursday that markets are pricing in three rate cuts this year, a forecast he described as reasonable, according to Reuters. Vujčić also suggested that the ECB could remove its reference to a "restrictive policy" in the March statement, citing expectations of a swift decline in services inflation in the coming months.

Interest rates FAQs

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.

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.

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.

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.

 

Source: Fxstreet