EUR/JPY drops to weekly low around 159.00 after Ishiba wins LDP leadership race

• EUR/JPY is down around 450 pips on the day and is being pressured by a combination of factors.
• Ishiba wins LDP presidential election to become Prime Minister of Japan and boosts JPY.
• Better French and Spanish CPI prints weigh on the euro and put further pressure on the cross.

The EUR/JPY cross saw a dramatic intraday reversal and is down about 450 pips from its August 16 high set earlier on Friday. The downward trajectory is pulling spot prices to a new weekly low in the first half of the European session, although it is stalling near the 159.00 round-digit mark.

The Japanese yen (JPY) is rallying across the board after former defense chief Shigeru Ishiba defeated Sanae Takaichi to become the next leader of the ruling Liberal Democratic Party (LDP) and secure the role of Japan’s prime minister at a fifth attempt. The news was taken positively by JPY bulls, as was the one that has been vocal in scrutinizing the Bank of Japan (BoJ) for raising rates too quickly. This proved to be a key trigger behind the initial stage of a strong intraday decline for the EUR/JPY cross.

Selling bias accelerated after the release of weaker consumer inflation figures in France and Spain. Preliminary data from statistics agency INSEE showed that consumer prices in France rose less than expected and the harmonized rate of inflation rose 1.5% from a year ago, down from 2.2% in the month precedence. In addition, the flash indicator developed by the INS revealed that the Spanish Consumer Price Index (CPI) decelerated to a rate of 1.5% YoY, from 2.3% in August.

The weaker data reaffirmed market bets for an interest rate cut of at least 25 basis points (bps) by the European Central Bank (ECB) at its next policy meeting in October. This in turn weighs heavily on the common currency and further contributes to EUR/JPY falling. Meanwhile, core inflation in Tokyo – Japan’s capital – matched the BoJ’s 2% target in September, which, along with risk-on sentiment, limits gains for the safe-haven JPY and helps the cross back into the 159 area ,40-159,50.

However, investors continue to weigh the possibility of another BoJ rate hike by the end of this year. This in turn favors JPY bulls and supports the prospects for a further bearish move in the EUR/JPY cross. Even technically, the formation of a “Death Cross” on the daily chart – the 50-day simple moving average (SMA) crossing below the all-important 200-day SMA earlier this month – validates the downside outlook and supports the prospects for further losses.