Forex News
Brown Brothers Harriman reports that USD/JPY is trading directionless above 159.00 after Japan’s Ministry of Finance conducted record-sized FX intervention to cap the pair around 160.00. The bank notes that lower Oil prices may help pull USD/JPY toward 155.00, but a sustained break below that level would require a more hawkish Bank of Japan, which they see as unlikely for now.
Record intervention anchors Yen ceiling
"USD/JPY is directionless above 159.00. Japan's Ministry of Finance purchased a total of ¥11.735 trillion in the period from April 28 through May 27 to stem the surge in USD/JPY."
"That’s the biggest intervention amount on record and underscores authorities’ determination to keep a lid on USD/JPY around 160.00."
"The correction in crude oil prices takes some pressure off JPY and could help nudge USD/JPY lower to 155.00."
"But breaking materially below that level hinges on the Bank of Japan to lean more hawkish. It’s too soon to bet on that because almost all underlying CPI indicators softened in April."
(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)
- Annual CPI inflation in Germany declined at a faster pace than expected in May.
- EUR/USD continues to trade in a tight channel at around 1.1650.
Annual inflation in Germany, as measured by the change in the Consumer Price Index (CPI), softened to 2.6% in May's flash estimate from 2.9% in April. This print came in below the market expectation of 2.8%. On a monthly basis, the CPI declined 0.2% following the 0.6% increase recorded in April.
The Harmonized Index of Consumer Prices, the European Central Bank's (ECB) preferred gauge of inflation, declined 0.1% on a monthly basis and rose 2.7% on a yearly basis. Both of these prints came in below analysts' estimates.
Market reaction
EUR/USD showed no immediate reaction to these figures and was last seen trading virtually unchanged on the day at 1.1645.
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
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