EUR/JPY rises after Eurozone inflation data comes in as forecast

• EUR/JPY is recovering from several days of weakness after Eurozone inflation came out as expected.
• There was speculation that the result would fall below expectations due to weaker-than-forecast German and Spanish inflation on Thursday.
• Japanese data showed a rise in inflation in Tokyo, suggesting the BoJ may raise rates, supporting the JPY.

EUR/JPY is trading a quarter of a percent higher at just above 161.00 on Friday after the release of euro zone inflation data for July met economists’ expectations.

Lower-than-expected German and Spanish inflation, released on Thursday ahead of the region-wide figure, set the stage for a similar below-expected drop in eurozone inflation. However, in the end this was not the case and the euro was back in the news.

The euro zone’s annual consumer price index (CPI) rose 2.2 percent in August, according to estimates, and was lower than the 2.6 percent rise reported in July. While this marked the lowest rise in consumer prices in the euro area since July 2021 and contrasted with the rest of the year – where inflation was between 2.4% – 2.6% – it was in line with estimates by supported for Euro and EUR/JPY .

The data is unlikely to change the data-dependent European Central Bank’s (ECB) gradual and cautious stance on interest rate cuts, according to Nordea Bank. The fact that the ECB is unlikely to cut interest rates aggressively supports the euro, as higher interest rates for longer attract greater inflows of foreign capital.

“Headline inflation eased to 2.2% y/y in August – the closest it has been to the ECB’s 2021 inflation target – but risks remain: wage growth remains high and will keep core inflation sticky for the rest of this year” , says Anders. Svendson, Chief Analyst at Nordea Bank.

One reason for the ECB’s “cautious and gradual” approach is that services inflation remains high at 4.2% and is unlikely to fall much before 2025, given generous forecasts for wage increases in the second half of 2024.

“Negotiated wage growth will remain high in the second half of the year, which is also likely to keep service price inflation high,” says Svendson.

In addition, core CPI inflation remains relatively high at 2.8% and is “proving sticky,” according to the analyst.

EUR/JPY could remain range-bound as the Japanese yen (JPY) gains support from recent Japanese data. It showed that inflation in Tokyo, as measured by the Tokyo Consumer Price Index, rose above economists’ estimates.

Tokyo’s annual CPI, excluding fresh food, for July was 2.4 percent, compared with 2.2 percent the previous month and beating expectations of 2.2 percent, according to Japan’s Statistics Bureau data released on Thursday. This suggests the possibility that Japan’s inflation may show a similar increase. This, in turn, would support the case for the Bank of Japan (BoJ) to continue raising interest rates in Japan, supporting the yen in the process.

Employment data released at the same time as the Tokyo CPI, however, was not as strong. Japan’s unemployment rate unexpectedly rose to 2.7 percent in July from 2.5 percent in June.

Analysts at Capital Economics, however, dismissed the rise in unemployment, saying “our belief that the Bank (BoJ) will continue with another rate hike is growing”.

“The jump in the unemployment rate in July is a belated response to the weakness in economic activity earlier in the year,” said Marcel Thieliant, head of Asia-Pacific at Capital Economics.

“With July industrial production and retail sales data pointing to another decent Q3 GDP increase, the labor market should tighten again soon. And with Tokyo CPI suggesting core inflation is settling around the Bank of Japan’s 2% target,” he added.