Euro advances against Japanese Yen ahead of ZEW Survey data
- EUR/JPY rises as higher oil prices increase Japan's import costs, putting heavy upward pressure on the Japanese Yen.
- Bank of Japan tightening, unwinding carry trades, and asset repatriation limit JPY’s downside.
- LSEG data prices a December ECB rate hike at 94%, with Citi predicting monetary tightening could extend into March 2027.
EUR/JPY extends its gains for the second consecutive day, trading around 179.00 during European hours on Tuesday. The currency cross is trending upward as the Japanese Yen (JPY) faces headwinds from rising global oil prices, which significantly inflate import costs for Japan's energy-dependent economy.
Despite these immediate pressures, the JPY could retain underlying support from anticipation of more aggressive monetary tightening by the Bank of Japan (BoJ); the ongoing unwinding of global carry trades and subtle signs of domestic investors repatriating foreign assets all provide a steady cushion for the currency.
Meanwhile, the Euro (EUR) continues to find firm backing from persistent hawkish sentiment surrounding the European Central Bank (ECB). Traders await ZEW Survey data for Germany and the Eurozone later in the day.
Key ECB officials have repeatedly warned of lingering upside inflation risks, signaling that additional rate hikes remain on the table following their recent quarter-point policy increase. Financial markets and major institutional players are rapidly aligning around this hawkish trajectory. Leading banks, including Goldman Sachs, Citi, and Barclays, are forecasting another rate increase in December. Market pricing strongly echoes this outlook, with LSEG data placing the odds of a December quarter-point hike at 94%, while Citi expects the tightening cycle to potentially stretch into March 2027.
Commerzbank shifts to higher-for-longer ECB rate path
Economists at Commerzbank report that the latest hawkish signals from the ECB have forced a rethink of their policy outlook. “This has prompted us to revise our ECB forecast,” they explain, noting that they “now expect a third rate hike in December, when the next set of projections is released, bringing the deposit rate to 2.75%.” Reflecting concerns that “persistently high inflation, particularly core inflation,” will keep price pressures above target for longer, they add that they “no longer anticipate rate cuts in 2027.”
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.