- JPY Steadie is about 161.85 in the early European session on Friday.
- Inflation in the consumer price index in Japan grew by 3.6 % on an annual basis in March.
- The European Central Bank rates reduced by 25 basis points to 2.25 % at the April meeting on Thursday.
EUR/JPY CROSS trading flat near 161.85 during the early European session on Friday. US President Donald Trump’s trade war is still a source of deep certainty. However, on Thursday, Trump presented some encouraging signals that negotiations with other countries can lead to low tariffs. Optimism surrounding commercial conversations can undermine safe currencies like Japanese yen (JPY).
The Japanese National Consumer Prices Index (CPI) grew by 3.6 % on an annual basis in March, which represents three consecutive years that the main inflation number is the highest goal of bank (BOJ) by 2 %. This number was less than 3.7 % recorded in February.
Meanwhile, the “basic” inflation rate, which raises the prices of both fresh foods and energy, increased to 2.9 % on an annual basis in March from 2.6 % in February. The basic inflation, which expels fresh food prices, jumped to 3.2 % yearly in March from the previous 3.0 % reading. The number was in line with the market consensus.
The data comes before the BOJ policy meeting on May 1. BOJ is expected to keep the interest rates fixed by 0.5 % and reduced its growth estimates as Trump’s sharp tariffs are expected. Traders are also closely monitoring developments in the country’s commercial negotiations.
On the euro front, the European Central Bank (ECB) reduced the main interest rate by a quarter of a percentage to 2.25 % at its meeting in April on Thursday, noting increasing trade tensions after Trump’s tariff sparked a global trade war. European Central Bank President Christine Lagarde said at the press conference that the American definitions of the European Union goods, which increased from 3 % to 13 %, were already hurting the European economy’s view.
Dovish’s position from the European Central Bank can weigh the common currency against JPY. “It has Duofish’s tone. The focus has turned into a negative risks to growth expectations, rather than upward risks to inflation,” said Cuestin Conde Nielsen, an analyst at Dansky Bank Danki.
Common questions about inflation
Inflation measures an increase in the price of a representative basket for goods and services. The main inflation is usually expressed as a change in percentage on a month on a monthly (illiterate) basis on an annual (annual) basis. Basic inflation excludes more volatile elements such as food and fuel that can fluctuate due to geopolitical and seasonal factors. The basic inflation is the number that economists focus on and is the level targeted by central banks, which are assigned to maintaining inflation at a controlled level, and is usually about 2 %.
Consumer price index (CPI) measures changing commodity and services basket prices over a period of time. It is usually expressed as changing a percentage on a month basis on a monthly (illiterate) basis and on an annual basis (YOY). Core CPI is the number targeted by central banks as it excludes food and flying fuel inputs. When the basic consumer price index rises above 2 %, it usually leads to high interest rates and vice versa when less than 2 % is less than 2 %. Since high interest rates are positive for the currency, high inflation usually leads to a stronger currency. The opposite is true when the inflation falls.
Although it may seem intuitive, high inflation in a country pays the value of its currency and vice versa to reduce inflation. This is because the central bank usually raises interest rates to combat higher inflation, which attracts more global capital flows from investors looking for a profitable place to enter their money.
In the past, gold was the asset investors turned in times of high inflation because it maintained its value, and while investors will often buy gold for its safe properties in times of extremist turmoil in the market, this is not the case most of the time. This is because when inflation is high, central banks will put interest rates to combat them. The highest interest rates are negative for gold because it increases the costs of maintaining gold in assets that bear interest or placing money in the calculation of cash deposits. On the other hand, low inflation tends to be positive for gold because it leads to low interest rates, making the bright metal a more applicable investment alternative.
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