EUR/JPY holds in familiar territories as investors get set for the Jackson Hole

• EUR/JPY consolidates into the Jackson Hole at a key point in financial markets.
• The focus turns to the BoJ, ECB and Fed as central banks throw the kitchen sink at inflation risks. 

EUR/JPY is down 0.38% at the time of writing and has fallen from a high of 136.98 to a low of 136.01 on the day so far as the market consolidated in the main ahead of keynote speeches at the Jackson Hole that started today. The dollar index and the euro both slipped on Thursday in choppy trading as investors waited on a speech by Federal Reserve Chairman Jerome Powell on Friday for further clues about the ongoing pace of the US central bank’s rate hikes.

Meanwhile, despite the economic difficulties, the inflationary implications of higher energy prices in the eurozone are keeping the euro bulls in check despite prospects of higher rates. Another rate hike is widely expected in September but is only likely to provide fleeting support for the EUR given the stagflation fears. 

This makes for a very compelling Jackson Hole this year, considering Much of the world is facing many of the same problems as the early 1980s with strong price growth and the fears of a repeat of that era’s wage-price spiral phenomenon and double-digit interest rates. The outlook is probably much worse for the energy-importing Europe which may give the yen the edge as the US dollar continues to pick up the safe haven bid. Russia’s invasion of Ukraine has led to sky-rocketing energy prices that look set to keep on accelerating. This has led to the ECB last month needing to raise interest rates for the first time in 11 years.

As for the Bank of Japan, considering the current increase in headline inflation readings, the central bank is expected to exit its unsustainable policy, Yield Curve Control, or YCC. However, due to the rise of commodity prices and Japanese imports, an exit may only be temporary as wages struggle to keep up with the pace, leading to a deflationary environment. With Japanese interest rates still at minus 0.1 per cent, a divergence in global yields earlier this year sent the yen to a 24-year low against the US dollar and there could be more to go as the BoJ continues its effort to hit and sustain its 2% inflation target.