As of now, the EUR/JPY exchange rate sits at approximately 185.40, reflecting a 0.15% decrease on Wednesday. This shift comes as the euro has weakened while the Japanese yen has gained strength. The pressure on the euro is largely due to a more pronounced slowdown in inflation across the euro zone, while the yen benefits from its safe-haven status and ongoing speculation about potential intervention by Japanese officials.
Preliminary figures indicated that the harmonized consumer price index (HICP) in the euro area increased by 2.8% year-on-year in June, which is a drop from 3.2% and below what markets had anticipated. On a monthly basis, the index declined by 0.1% after a slight increase of 0.1% in May.
Furthermore, the core HICP, which omits volatile categories such as food and energy, also showed a larger-than-expected easing, recording a 2.4% rise year-on-year in June—down from 2.6% and under the consensus prediction of 2.6%. On a monthly basis, core HICP’s increase moderated to 0.2%, compared to the previous month’s 0.3% rise.
This lower-than-expected inflation rate dampens expectations for additional interest rate hikes from the European Central Bank (ECB), putting further downward pressure on the euro. Before the inflation data was released, ECB Governing Council member and German Bundesbank President Joachim Nagel expressed only limited support for the euro, mentioning that inflation risks remained skewed toward the upside. He indicated that the ECB would keep all options open for the upcoming policy meetings in July and September and noted that he anticipated inflation would stay elevated this year and exceed the ECB’s target through 2027. However, he made it clear that the June rate hike was not merely a precautionary move.
On the other hand, the Japanese yen continues to strengthen. Traders are cautious about the possibility of intervention following comments from Japanese Finance Minister Satsuki Katayama, who indicated on Tuesday that authorities stand ready to intervene in the event of excessive currency volatility, although she didn’t specify particular exchange rate levels.
Comments from new Bank of Japan director Ayano Sato have also bolstered the yen’s position. He stated that a weaker yen might influence inflation more significantly than in the past due to companies becoming more proactive in raising wages and prices. He affirmed that monetary policy ought to focus on inflation while fiscal policy should alleviate any negative effects on households and businesses.
Analysts at Société Générale suggest that investors may be testing the Japanese authorities’ resolve once again. They highlighted that the USD/JPY exchange rate at 165 yen could serve as a critical threshold after previous interventions, warning that substantial short-covering positions might emerge in the yen if the market revisits the Federal Reserve’s outlook or if the Bank of Japan proceeds with further interest rate hikes.
