The EURJPY forex pair shrugged off higher European inflation data on Thursday, but the trend could still target last year’s highs.
EURJPY – Weekly Chart
EURJPY has resistance at the 148 level, which is 300 pips higher, and that could be the next level for bulls.
The headline inflation level was actually lower in the eurozone at 8.5%. Although traders cheered that number, it still shows that aggressive interest rate hikes do not have the effect central banks desired. Core inflation rose to an estimated 5.6% in February from 5.3% in January.
Comments from a European Central Bank chief reaffirmed that bringing the interest rate down will take some time and that more work has to be done. Headline inflation was as high as 10.6% in October but fell to a revised 8.6% in January. Analysts had been expecting a lower February inflation rate of 8.2%. Food prices increased month-on-month, offsetting declines in energy costs.
According to Reuters, ECB President Christine Lagarde said on Thursday that bringing down inflation will take time. The European Central Bank still maintains its target rate of 2%. The bank has indicated that another 50 basis point hike is on the cards for when the central bank meets later this month. Analysts at Goldman Sachs said earlier in the week that they were raising rate hike expectations for the ECB and pricing in another 50 basis points hike in May.
European bond yields have been trading at multi-year highs recently as investors consider that the hawkish monetary policy is here to stay.
For the euro versus the Japanese yen, this will widen the funding rates between Europe and Japan. At the same time, the Bank of Japan is hesitant to make any substantial changes to monetary policy.
Stefan Angrick of Moody’s Analytics told CNBC that the Bank of Japan will probably relax its yield curve control and said that dropping the policy altogether is a “logical option.”
However, the incoming governor, Kazuo Ueda, admitted that he did not have a “magical” monetary policy solution to fix the country’s decades-long battle to boost inflation when he appeared in front of the Japanese parliament last week.
Japan has finally seen some inflation over the last year, so it is unlikely that the BOJ will intervene. That should be the fuel that helps the euro to test the 2022 highs versus the yen.
When the BoJ finally allows yields to rise, Japanese investors who have invested overseas for returns would likely bring their cash home, hurting global bonds but boosting the yen.
“Japanese investors are very underweight in the domestic bond market, and would most likely repatriate large amounts of capital that have been invested abroad in the past decade for want of domestic alternatives,” said Deutsche Bank analyst Robin Winkler.
