EUR/JPY fell from a seven-week high of 163.50 on firm ECB bets.

• EUR/JPY falls sharply to near 162.70 as ECB rate cut bets weigh on the euro.
• ECB Villeroy warned of growing risks of an economic slowdown in the euro zone.
• Middle East tensions led to higher safe-haven flows in favor of the Japanese yen.

EUR/JPY is falling sharply from a seven-week high around 163.50 to near 162.70 in the European session on Monday. The cross weakens as the euro (EUR) faces pressure amid growing speculation that the European Central Bank (ECB) may cut key lending rates further at its October 17 policy meeting.

The ECB cut its deposit facility rate by 25 basis points (bps) to 3.5% on September 12. This was the ECB’s second dovish decision in its current policy easing cycle. And now more interest rate cuts are expected from the ECB this month as officials worry about growing risks that monetary policy will remain tight for too long, suggesting weak economic growth with confidence in inflation falling to target the bank of 2%.

This weekend, ECB policymakers and head of the French Central Bank, François Villeroy de Galhau, said in an interview with La Repubblica: “If next year we are sustainable at 2% inflation and with still slow growth prospects in Europe, there will be no reason for our monetary policy to remain tight and our rates to be above the neutral interest rate.”

Meanwhile, a faster-than-expected decline in German factory orders in August also pointed to weakening demand and the need for further policy easing. Annual factory orders fell 3.9 percent after rising 4.6 percent in July. Month-on-month new factory orders contracted at a faster-than-expected 5.8 percent.

On the Tokyo front, conflicts between Israel and Iran in the Middle East region led to safe flows to the Japanese Yen (JPY). The Japanese currency is also being strengthened by renewed fears of possible intervention, as suggested by a speech by Japan’s Finance Ministry’s Vice Finance Minister for International Affairs, Atsushi Mimura, in Monday’s Asian session.