Euro advances against Japanese Yen ahead of ZEW Survey data

Euro strengthens against Japanese Yen in anticipation of ZEW Survey results

The EUR/JPY currency pair has seen a second consecutive day of gains, trading near 179.00 during European trading hours on Tuesday. The Japanese Yen (JPY) is facing downward pressure due to rising global oil prices, which increase import costs for Japan's energy-dependent economy. Despite these challenges, the JPY may still benefit from expectations of more aggressive monetary tightening by the Bank of Japan (BoJ).

Additionally, the ongoing unwinding of global carry trades and hints of domestic investors repatriating foreign assets provide a stabilizing influence for the currency.

Meanwhile, the Euro (EUR) benefits from persistent hawkish sentiment from the European Central Bank (ECB). Traders are eagerly awaiting the ZEW Survey data for Germany and the Eurozone, which will be released later in the day. ECB officials have repeatedly cautioned about persistent inflation risks, signaling that further rate hikes are likely following their recent quarter-point increase.

Major financial institutions, such as Goldman Sachs, Citi, and Barclays, are predicting another rate hike in December. The market pricing reflects this expectation, with a 94% chance of a December quarter-point hike according to LSEG data, and a potential extension of the tightening cycle into March 2027, according to Citi analysts.

Commerzbank economists have revised their policy outlook, expecting a third rate hike in December when the next set of projections is released, pushing the deposit rate to 2.75%. They note that persistently high inflation, particularly core inflation, will likely keep price pressures above target for a longer period. They also anticipate no rate cuts in 2027.

Interest rates are set by central banks to maintain price stability, typically targeting a 2% core inflation rate. If inflation falls below this target, central banks may lower base lending rates to stimulate lending and boost the economy. Conversely, if inflation exceeds 2% significantly, central banks usually raise base lending rates to curb inflation.

Higher interest rates generally strengthen a country's currency, making it more attractive for global investors. This can lead to a decline in the price of gold, as it is priced in dollars and the higher interest rates increase the opportunity cost of holding gold instead of interest-bearing assets. The Federal Funds Rate, set by the Federal Reserve, influences market expectations for future monetary policy decisions.