The EUR/JPY currency pair extended its gains for the second consecutive session on Friday, trading around 172.90 during Asian hours. The cross has appreciated as the Euro (EUR) gains ground against the Japanese Yen (JPY) ahead of the release of German August Harmonized Index of Consumer Prices (HICP) data.
Market participants are approaching the session with caution, while focus also shifts toward the University of Michigan (UoM) Consumer Sentiment Index, scheduled for later in the North American session. Fletrade’s team presents a thorough analysis of the matter for readers in this piece.
EUR/JPY Gains on Cautious Market Sentiment
The recent upward momentum in EUR/JPY reflects a combination of macroeconomic factors and central bank policy expectations. Traders have adopted a risk-aware stance ahead of the German HICP print, which is a key gauge of inflation trends in the Eurozone.
The Euro has strengthened as the European Central Bank (ECB) maintained a relatively optimistic outlook on growth and inflation, signaling a reduced likelihood of further monetary easing.
ECB Holds Rates Steady, Maintains Optimistic Outlook
At its September policy meeting, the ECB decided to hold the Deposit Facility Rate at 2.0% and the Main Refinancing Operations Rate at 2.15%. The central bank emphasized its positive stance on economic growth and its commitment to price stability, which has tempered market expectations for additional rate cuts.
Following the decision, money markets have priced in only 40% odds of a final rate reduction by next spring, lower than before the ECB announcement, according to Reuters. The ECB’s guidance reflects confidence in the Eurozone’s inflation trajectory, providing support to the EUR/JPY pair as investors recalibrate their expectations for monetary policy divergence.
Japanese Yen Faces Headwinds
The JPY has struggled in recent sessions, weighed down by a combination of political uncertainty and monetary policy expectations. With Japanese Prime Minister Shigeru Ishiba resigning, markets anticipate that his successor may exert pressure on the Bank of Japan (BoJ) to maintain ultra-low interest rates.
The potential delay in policy normalization adds an element of uncertainty, limiting the JPY’s upside against the EUR. As a result, the EUR/JPY cross has found technical support and continued its uptrend, with market participants monitoring any hints of BoJ policy adjustments closely.
Risk-On Sentiment Supports EUR/JPY
Beyond central bank dynamics, the JPY is facing safe-haven outflows amid a broader risk-on market sentiment. Investors are pricing in three potential Federal Reserve (Fed) rate cuts this year, bolstered by weaker US labor market data.
US Weekly Initial Jobless Claims recently hit their highest level since October 2021, following last week’s disappointing Nonfarm Payrolls report, despite a hotter-than-expected US Consumer Price Index (CPI) reading. These developments have reinforced expectations for a more accommodative Fed policy, which has fueled risk appetite and contributed to JPY weakness.
German HICP Data Set to Influence EUR/JPY Volatility
The release of German August Harmonized Index of Consumer Prices (HICP) is expected to play a pivotal role in driving EUR/JPY volatility. As Germany accounts for a significant portion of the Eurozone economy, any unexpected inflation readings could impact ECB policy expectations and, in turn, the Euro’s strength.
Traders are closely monitoring the year-on-year and month-on-month HICP figures, which provide insight into consumer price trends, economic momentum, and potential monetary tightening or easing.
Technical Levels to Watch
From a technical perspective, EUR/JPY is testing resistance near 173.00, a level closely watched by traders and market analysts. Support lies around 172.50, with momentum indicators signaling continued short-term bullishness.
Traders remain vigilant ahead of the German HICP release, as any surprise in inflation data could trigger sharp moves in EUR/JPY, especially given the currency pair’s sensitivity to Eurozone economic indicators. Similarly, attention will shift to the UoM Consumer Sentiment Index, which could influence risk appetite and cross-currency flows during the US session.
Outlook for EUR/JPY
The near-term outlook for EUR/JPY is shaped by the interplay of central bank policy divergence, macroeconomic data releases, and risk sentiment. The ECB’s optimistic guidance provides underlying support for the EUR, while JPY weakness, driven by political uncertainty and expectations of low BoJ rates, continues to bolster the cross.
Traders will closely monitor the German HICP, as stronger-than-expected inflation could reinforce EUR strength, whereas weaker readings might limit the upside potential. Meanwhile, US economic indicators and Fed policy expectations remain key drivers for risk sentiment, impacting JPY flows and the broader FX market dynamics.
In summary, EUR/JPY is benefiting from a combination of Euro strength, BoJ policy caution, and risk-on sentiment, with market participants keeping a watchful eye on upcoming data releases and central bank signals. The currency pair’s trajectory toward 173.00 will likely hinge on the interplay between German inflation readings, Japanese policy outlook, and global risk sentiment in the coming sessions.
