The Euro and Japanese Yen have calmed down. Flattening out over the North American trading day, the EUR/JPY currency pair now stands even at roughly 163.40. Investors are watching to see what happens in the still-ongoing trade talks between the U.S. and European Union. They are, no doubt, hungry for new insight that might move currency valuations. The Euro, which is currently the official currency of 19 member countries in the Eurozone, is getting some very positive, and in some cases very negative, economic signals from around the region.
Its recent Euro’s resiliency has been nothing short of remarkable. That said, upward momentum could be offset by downside forces, including some disappointing inflation numbers out of France. Initially, the Japanese Yen benefitted from the global rise in government bond yields. This increase in demand for the currency has raised its value tremendously against most major currencies. This interplay between the two currencies reflects broader trends in global finance as market participants assess economic indicators and their implications for monetary policy.
Currency Dynamics in the Forex Market
For example, the EUR/USD currency pair is the most traded in the world. Though it represents less than 1% of all transactions, it represents over 30% of all foreign exchange transactions! Moreover, the Euro itself makes up about 31% of total foreign exchange transactions worldwide. With an average daily turnover of more than $2.2 trillion, the Euro’s impact is strong throughout the global forex market.
The EUR/JPY is trading as the fourth most popular currency pair in daily transactions accounting for approximately 4% of all trades. At the same time, Yen continues to be the second most traded currency in the world, underscoring its importance as a key driver of cross-border trading flows. Another factor that has helped those Yen to appreciate has been the sharp rise in Japanese government bond yields. This trend was exacerbated when the Ministry of Finance announced its readiness to make changes to its bond program.
Yields on the 10-year Japanese Government Bond (JGB) skyrocketed by 3%, approaching 1.52%. The steep hike indicates increasing investor confidence and optimism about Japan’s forthcoming policies, particularly fiscal and monetary policy. The combination of higher yields and strong demand for Yen-denominated assets has created strong upward momentum for the currency.
Economic Indicators Impacting the Eurozone
Amidst many uncertainties, Eurozone politics are heating up once again as key indicators – most notably inflation – are starting to become more widely criticized. Following the recent trend, France just reported that their CPI increased just 0.6% in May. This is a 0.4 percentage point slowdown from the 0.9% rise in April. The deceleration has raised alarm bells causing fears of inflationary pressures in the Euro area. It will further affect the policy direction of the European Central Bank (ECB).
François Villeroy de Galhau, the French central bank chief and ECB policymaker, described the slowing inflation rate as a “very encouraging sign of disinflation in action.” His comments imply that policymakers should find room to loosen monetary policy to spur growth in face of lackluster price pressures.
Villeroy stated that “policy normalization in the Euro area is probably not complete.” This increasingly dovish stance provides the perfect cover for an interest rate cut by the ECB during its next meeting in June. Moreover, continued weakness in inflation data points to further headwinds for economic growth across large Eurozone economies.
Implications for Global Investors
The interaction between interest rates and currency values remains the central factor driving global investor sentiment. High interest rates create a massive pull factor for investors seeking safe havens with high returns. This temptation makes the region unique compared to its peers. Germany, France, Italy and Spain are the four largest Euro area economies. Collectively, they’re responsible for roughly three-quarters of the region’s economy, making their economic performance a critical factor determining the Euro’s future direction.
With clouds of uncertainty still shrouding US-EU trade negotiations, investors are watching closely to gauge how these currents will affect currency values. A successful resolution would strengthen investor confidence toward both currencies, while even a temporary disruption could turn back recent advances.