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ECB Set to Increase Rates for the First Time in 11 Years

Today the European Central Bank is predicted to increase its main refinancing rate for the first time in 11 years. The question, which all traders are now asking themselves, is whether the central bank will increase its rates by 25 basis points or 50 basis points. Economists are also split on this matter, with some leaning towards 50 basis points and others towards 25.

The EUR/JPY is increasing again this morning after declining throughout most of yesterday. Out of the past 7 trading days, yesterday saw the only decline. Today, the price of the exchange has increased by 0.54% so far and almost fully regained yesterday’s lost value. It should also be noted that the price is still 2% below the most recent significant resistance level.

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The Euro has generally been struggling throughout the year for various reasons, but it’s gained some momentum over the past week due to today’s ECB announcement. Inflation statistics in June added 0.8% and the annual value reached 8.6%, which is fully consistent with the predictions previously provided by the European Central Bank. This data will influence the decision of the central bank members during today's monetary policy meeting. The fact that inflation in the Eurozone remains in line with expectations may signal an increase in interest rates by the standard 25 basis points.

However, some economists believe that the ECB may take a more hawkish stance. David Kohl, a chief economist in Europe, supports a 50 basis point hike. According to him, if the ECB increases the interest rates by 25 basis points, the Euro may receive support in the shorter term. But with a hike of 50 basis points, the currency is likely to receive longer term support.

The EUR/JPY is also being influenced by the Bank of Japan’s monetary policy confirmation and press conference early this morning. As predicted, the BoJ maintained its current soft monetary policy and kept the interest rates unchanged. Japan’s regulator is one of the few central banks which is not providing any indications of rate hikes.

There are already growing fears among investors and experts that the dovish course of the financial regulator is incorrect. It should be noted that the growth of consumer prices in the country, supported by the upward dynamics of energy tariffs, has been exceeding BoJ’s target level of 2.0% for two months. Analysts polled by Reuters agreed that by the end of the year the indicator will reach at least 2.4%, which, for an economy that has been under threat of deflation for years, is deemed to be significant. They fear that if the regulator does not act now, the Yen will lose value even more rapidly. This is likely to affect consumer demand and further damage the currency’s purchasing power.

Investors will continue positioning their trades based on this morning’s Bank of Japan announcements. In addition to this, investors will of course be closely monitoring the expected rate hikes due to be confirmed by the ECB.

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