the Euro and Japanese Yen are doing pretty well at the moment. As of the publication of this report, the EUR/JPY currency pair is relatively flat around 163.40 during North American trading hours. Investors are closely monitoring developments in U.S.-EU trade talks and recent economic data from the Eurozone, particularly regarding inflation in France, which could influence future monetary policy decisions.
The Euro is the official currency for 19 of 27 member countries in the European Union. This places it as one of the most powerful forces in global finance. The EUR/USD is the world’s most heavily traded currency pair. In fact, it accounts for roughly a third of all forex trades. The Euro’s strength in the foreign exchange market represents 31% of all OTC transactions and regularly surpasses $2.2 trillion in average daily turnover.
Yen Strengthens on Bond Yield Surge
The Japanese Yen has benefited from a surge in government bond yields, helping propel it higher recently. In response, the yield on the 10-year Japanese Government Bond (JGB) jumped by 3% to over 1.52%. That massive expansion comes on the heels of strong hints from Japan’s Ministry of Finance that Japan is potentially rethinking the composition of its bond program.
In general, higher bond yields tend to attract foreign investment. This new trend hardens the Yen, equipping it to soon become the world’s second most traded currency, following closely behind the US Dollar. Analysts are predicting this will continue, so long as bond yields continue their upward trajectory, giving the currency even more support.
Investors are just as laser-focused on how these yield moves shape broader market sentiment. Higher yields usually reflect positive economic growth prospects, which tend to increase demand for the currency and cause it to appreciate.
Eurozone Inflation Data Influences ECB Outlook
We’ve got the reaction from soft CPI out of France igniting new hopes for an ECB interest rate cut this June. Accordingly, hopes are growing on the European side. In France, year-on-year CPI was up a paltry 0.6%. This is a decrease from the prior increase of 0.9% that was measured in April. This slowing inflation is seen as a “very encouraging sign of disinflation in action,” according to François Villeroy de Galhau, an ECB policymaker and chief of the French central bank.
His statements reflect a dovish stance on interest rates, emphasizing that “policy normalization in the Euro area is probably not complete.” There is therefore still considerable leeway for the ECB to pursue a more expansionary monetary policy. Such flexibility could make the Euro more attractive to investors than the current status quo.
The highly anticipated economic data from Germany, France, Italy and Spain is key. Together, these four countries are responsible for 75% of the Eurozone’s economic production. Any change in the inflation dynamic or economic growth performance among these countries would dramatically affect the strength of the Euro. Get ready to experience some ups and downs!
Interest Rates and Investment Appeal
Large interest rate advantages over other world regions increase the attractiveness of the Euro. They attract billions in global investment looking for stable long-term returns. As investors look for safe investments, interest rates and their effect on the investment decision between currencies are key variables.
Perhaps most importantly, the ECB’s strategy for taming inflation and controlling interest rates is key to keeping investors confident in the Eurozone’s long-term stability. Recent French data, however, point to disinflation. If nothing else, let this trend continue to build a compelling case for the ECB to change course in realizing a policy that matches the economic realities today.