EUR/JPY corrects to near 173.20, while both currencies face political crisis

• EUR/JPY retraces to near 173.20 as the Japanese Yen strives to gain ground.
• French PM Bayrou loses confidence vote in Parliament.
• Investors expect the ECB to hold interest rates steady on Thursday.

The EUR/JPY pair trades 0.17% lower to near 173.20 during the late Asian trading session on Tuesday. The pair faces selling pressure as the Japanese Yen (JPY) bounces back against its peers, while the political crisis in Japan continues to prevail following the resignation of Prime Minister Shigeru Ishiba from his position of President in ruling Liberal Democratic Party (LDP).

Japanese Yen Price Today

The table below shows the percentage change of Japanese Yen (JPY) against listed major currencies today. Japanese Yen was the strongest against the US Dollar.

The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the Japanese Yen from the left column and move along the horizontal line to the US Dollar, the percentage change displayed in the box will represent JPY (base)/USD (quote).

According to a report from NHK, Japan's PM Ishiba chose to step down to prevent a split within the party. Ishiba also stated that he will organize a leadership contest to choose his successor.

The political crisis in Japan comes at a time when the economy is facing trade war risk, and commentaries from Bank of Japan (BoJ) officials have indicated that they would struggle in hiking interest rates further.

In the Eurozone, the loss of French Prime Minister Francois Bayrou in the confidence vote after failing to gain enough support to pass the budget in Parliament has weighed on the Euro (EUR). Market experts believe that the downfall of the government for attempting to narrow the ballooning fiscal deficit will attract further credit-rating downgrades, a move that will increase borrowing costs for the administration.

This week, the major trigger for the Euro will be the announcement of the interest rate decision by the European Central Bank (ECB) on Thursday. Economists expect the ECB to hold the Deposit Facility Rate steady at 2% for the second time in a row.

Euro FAQs

What is the Euro?

The Euro is the currency for the 19 European Union countries that belong to the Eurozone. It is the second most heavily traded currency in the world behind the US Dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily turnover of over $2.2 trillion a day. EUR/USD is the most heavily traded currency pair in the world, accounting for an estimated 30% off all transactions, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).

What is the ECB and how does it impact the Euro?

The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy. The ECB’s primary mandate is to maintain price stability, which means either controlling inflation or stimulating growth. Its primary tool is the raising or lowering of interest rates. Relatively high interest rates – or the expectation of higher rates – will usually benefit the 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.

How does inflation data impact the value of the Euro?

Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), is an important econometric for the Euro. If inflation rises more than expected, especially if above the ECB’s 2% target, it obliges the ECB to raise interest rates to bring it back under control. Relatively high interest rates compared to its counterparts will usually benefit the Euro, as it makes the region more attractive as a place for global investors to park their money.

How does economic data influence the value of the Euro?

Data releases gauge the health of the economy and can impact on the Euro. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the single currency. A strong economy is good for the Euro. Not only does it attract more foreign investment but it may encourage the ECB to put up interest rates, which will directly strengthen the Euro. Otherwise, if economic data is weak, the Euro is likely to fall. Economic data for the four largest economies in the euro area (Germany, France, Italy and Spain) are especially significant, as they account for 75% of the Eurozone’s economy.

How does the Trade Balance impact the Euro?

Another significant data release for the Euro is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought after exports then its currency will gain in value purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.