Euro: Range-bound risks against US Dollar with ECB focus – OCBC

The Euro (EUR) recovered some of its initial losses against the Japanese Yen (JPY) during Tuesday's European trading session. By press time, EUR/JPY was down 0.3%, hovering around 178.85 after dipping to a low of 177.85 during the day. The table below illustrates the percentage change of Japanese Yen (JPY) against major currencies today, with the Japanese Yen emerging as the strongest against the New Zealand Dollar.

The heat map displays the percentage changes between major currencies. The market outlook for this pair remains bearish, as experts anticipate a robust Japanese Yen due to the Bank of Japan's (BoJ) continued monetary tightening cycle, even after a recent interest rate hike. Analysts at Commerzbank state that "an interest rate hike next week is now priced in at roughly 96%, and the market expects further hikes to follow quickly thereafter," emphasizing how rapidly expectations have shifted.

According to Commerzbank, "as long as expectations continue to shift in such a hawkish direction, the yen should have little trouble appreciating further," with the currency positioned well to benefit from this increasingly aggressive policy. Meanwhile, the focus remains on the European Central Bank's (ECB) interest rate decision on Thursday.

Experts believe the ECB will hike rates during the meeting, yet caution that moderate Eurozone economic growth and higher energy prices could complicate the central bank's monetary policy path. ABN Amro asserts that "for now, the path for the ECB is clear, and a rate hike at next Thursday's Governing Council meeting is fully priced by financial markets."

However, they highlight that "less clear now is what comes after," expecting the ECB to keep rates on hold for the rest of the year and potentially cut rates in Q2-Q3 next year. Strategists at OCBC note that higher energy prices have complicated the outlook for the ECB's tightening cycle, stating that inflation risks are becoming less comfortable against a backdrop of only moderate growth.

Central banks' primary mandate is to ensure price stability in a country or region. Economies frequently experience inflation or deflation when prices for certain goods and services fluctuate. Central banks aim to maintain demand by adjusting their policy rates. For major central banks like the US Federal Reserve (Fed), the European Central Bank (ECB), or the Bank of England (BoE), their mandate is to keep inflation close to 2%.

Central banks wield one significant tool to influence inflation: tweaking their benchmark policy rates, also known as interest rates. When central banks hike interest rates substantially, it is called monetary tightening; when they cut their benchmark rate, it is called monetary easing. A central bank is typically politically independent, with members chosen through various panels and hearings.

Each member often has a specific conviction on how the central bank should manage inflation and monetary policy. Depending on their stance—whether they favor a loose monetary policy (doves) or a tight monetary policy (hawks)—central bank members work to create consensus, with the chairman delivering speeches outlining the current monetary stance and outlook before a policy meeting.