EUR/JPY extends upside above 161.00 ahead of ECB rate decision
- UR/JPY gains momentum to near 161.15 in Thursday’s early European session.
- The concerns over tariff risks on Japan might contribute to the JPY.
- The ECB is anticipated to cut interest rates at the March meeting on Thursday.
The EUR/JPY cross extends the rally to around 161.15 during the early European session. The Japanese Yen (JPY) weakens against the Euro (EUR) amid the risk-on mood after US President Donald Trump will delay Canada and Mexico tariffs on autos for one month.
The White House announced a one-month delay for US automakers to comply with the US-Mexico-Canada Agreement from the tariffs imposed on Mexico and Canada. White House spokesperson Karoline Leavitt also said that Trump was “open” to extra tariff exemptions beyond the pause on auto levies. This, in turn, boost investors' appetite for riskier assets and drags the safe-haven currency like the Japanese Yen lower.
The growing concerns over tariff risks in Japan might contribute to the JPY’s downside. US President Donald Trump said that Japan and China are keeping their currencies down, signaling that he may impose fresh tariffs on imports if this does not stop.
However, the upside for the cross might be limited amid rising speculation of further hike from the Bank of Japan (BoJ). The BoJ is widely anticipated to continue hiking this year, supported by improving economic conditions, rising prices, and stronger wage growth, which align with the Japanese central bank’s policy normalization efforts.
On the Euro front, the European Central Bank (ECB) is expected to cut interest rates for the second time this year at its March meeting on Thursday. The markets are now fully priced in a quarter-point rate cut for the March meeting, taking the ECB’s key rate to 2.5% . A further reduction to 2% by the end of the year was also priced in.
ECB FAQs
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy for the region. The ECB primary mandate is to maintain price stability, which means keeping inflation at around 2%. Its primary tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.
In extreme situations, the European Central Bank can enact a policy tool called Quantitative Easing. QE is the process by which the ECB prints Euros and uses them to buy assets – usually government or corporate bonds – from banks and other financial institutions. QE usually results in a weaker Euro. QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The ECB used it during the Great Financial Crisis in 2009-11, in 2015 when inflation remained stubbornly low, as well as during the covid pandemic.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the European Central Bank (ECB) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the ECB stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Euro.