Euro Zone Inflation Data Awaited Amid Yen Volatility and Suspected Intervention

The euro zone is set to release inflation data for April on Tuesday amid significant volatility in the Japanese yen. The yen briefly touched a 34-year low of 160 per dollar on Monday before surging sharply, with traders citing suspected intervention by Japanese authorities to prop up the currency.

Preliminary inflation data from several German states showed price growth rising in April, suggesting that national inflation in Germany could rebound slightly this month after a downward trajectory. Economists expect Germany's harmonized inflation rate to remain unchanged at 2.3% in April, while Spain's inflation rose to 3.4% from 3.3% in the previous month. Euro zone inflation as a whole is expected to stay steady at 2.4%, according to a Reuters poll.

The expected pick-up in inflation is mainly driven by higher energy prices, including the scheduled re-increase in the VAT rate on gas and district heating, as well as the oil-price driven rise in motor fuel prices.

Meanwhile, the Japanese yen experienced significant volatility on Monday, briefly breaching the 160 per dollar level before reversing sharply. Traders cited yen-buying intervention by Japanese banks as a trigger for the bounce, though Japan's top currency diplomat Masato Kanda declined to confirm whether the finance ministry had intervened.

Why this matters: The volatility in the Japanese yen and the upcoming euro zone inflation data have implications for global financial markets and central bank policies. The suspected intervention by Japanese authorities highlights concerns over the yen's rapid depreciation, while the inflation figures could influence the European Central Bank's monetary policy decisions.

The yen's weakness is attributed to the large gap between Japanese interest rates and those in the rest of the world, as well as the behavior of Japanese companies reinvesting overseas earnings rather than repatriating them. A weaker yen means higher prices for imported goods in Japan, impacting businesses and households, though it may benefit the tourism industry.

Traders are also awaiting the Federal Reserve's policy decision on Wednesday, where the U.S. central bank is expected to maintain interest rates but take a hawkish stance after hotter than anticipated inflation reports in March. The prospect of rates staying higher for longer has lifted U.S. bond yields and boosted the dollar, although both were lower on Monday.

In a surprise piece of corporate news, HSBC announced that its chief executive Noel Quinn will retire after overseeing a sweeping series of asset sales across the globe in the past five years.

Analysts expect the yen's weakness to likely persist for the time being, as intervention can only reverse the price action temporarily and cannot offset global macroeconomic forces. "The fundamental trend of a weak yen is likely to continue, as the BOJ maintains its accommodative monetary policy in contrast with the U.S. Federal Reserve's tightening," said a market analyst.

Key Takeaways

• Euro zone to release April inflation data amid yen volatility.
• German inflation may rebound, while Spain's rises to 3.4%.
• Yen briefly hit 34-year low vs. dollar before suspected intervention.
• Yen weakness linked to interest rate gap, overseas earnings behavior.
• HSBC CEO to retire after asset sales, yen weakness likely to persist.