EUR/JPY was under pressure after cooling inflation hit the single currency

• EUR/JPY falls after the release of weaker-than-expected eurozone inflation data.
• Cooling inflation suggests the ECB will be more likely to cut interest rates, leading to outflows for the euro.
• The Japanese yen weakens after a false rally following Ishiba’s victory as he takes an accommodative stance.

EUR/JPY is trading just over a third of a percent lower on Tuesday at 159.30. The pair fell after eurozone inflation data showed lower-than-expected inflation across the bloc, suggesting the European Central Bank (ECB) will be more likely to cut interest rates in future meetings. This, in turn, is likely to lead to capital outflows and a weaker euro.

The euro area’s harmonized index of consumer prices (HICP) was 1.8% in September, up from 2.2% previously and the forecast of 1.9%, according to Eurostat. Core HICP fell to 2.7% from 2.8% previously and the same as expected. The data backs up comments from ECB President Christine Lagarde, who suggested inflation is falling to the central bank’s 2.0% target, as expected. “The latest developments reinforce our confidence that inflation will return to target in due course,” she said on Monday.

EUR/JPY rallied earlier in the week after incoming Japanese Prime Minister Shigeru Ishiba confounded markets, which had expected him to take a neutral approach. The yen rallied on news of Ishiba’s victory over rival Sanae Takaichi because of Takaichi’s explicit favoring of a weak yen to help Japanese exporters. However, on Monday Ishiba said that monetary policy should be kept accommodative (low interest rates) as economic conditions do not justify higher rates. His comments took investors by surprise and gave EUR/JPY a boost.

Japan’s Jibun manufacturing purchasing managers’ index (PMI) showed a slight pick-up in manufacturing activity, pushing up to 49.7 in September, according to data released during the Asian session on Tuesday, which was higher than the 49 .6 from the previous month and expectations from the same side. The data, while still in contractionary territory, could have put further pressure on EUR/JPY.