EUR/JPY is showing signs of recovery after a period of weakness, following the release of Eurozone inflation data that met economists’ expectations. Speculation had been rife that the results would fall below expectations due to lower-than-forecast German and Spanish inflation figures. However, the Eurozone-wide figure came in line with estimates, resulting in the Euro rebounding and EUR/JPY trading slightly higher at just above 161.00 on Friday.
The annual Consumer Price Index (CPI) in the Eurozone rose 2.2% in August, in line with expectations but lower than the 2.6% increase reported in July. Despite being the lowest uptick in consumer prices since July of the previous year, the data was seen as supportive for the Euro and EUR/JPY, as it reflected the European Central Bank’s cautious approach to reducing interest rates based on data dependency.
The ECB is expected to maintain its gradual stance on reducing interest rates, as indicated by Nordea Bank’s Chief Analyst Anders Svendson. Factors such as high wage growth and elevated services inflation at 4.2% are likely to keep core inflation sticky for the remainder of the year. This cautious approach by the ECB is also aimed at attracting foreign capital inflows with higher-for-longer interest rates.
The Japanese Yen (JPY) may continue to gain support from recent Japanese data, particularly in the form of rising inflation in Tokyo. The Tokyo Consumer Price Index exceeded economists’ estimates, suggesting a potential increase in Japan-wide inflation. This could further bolster the case for the Bank of Japan (BoJ) to raise interest rates, thereby supporting the Yen.
Despite a slight increase in the Japanese Unemployment Rate to 2.7% in July, analysts at Capital Economics believe that the BoJ will push ahead with another rate hike. They attribute the rise in unemployment to a lagged response to economic weakness earlier in the year, and expect the labor market to tighten again soon. With underlying inflation leveling off around the BoJ’s 2% target, the overall outlook remains positive for the Japanese economy.
Overall, the outlook for EUR/JPY remains steady, with the Euro supported by in-line inflation data and the Yen buoyed by positive Japanese economic indicators. The cautious approach of the ECB and the potential for further rate hikes by the BoJ are likely to influence the currency pair in the near term. Additionally, the stability in the Eurozone inflation figures and the resilience of the Japanese economy are key factors to watch for traders looking to make informed decisions in the forex market.
