EUR/JPY is trading lower after the release of weak Eurozone data

• EUR/JPY is down nearly half a percent after the release of weaker-than-expected retail sales and factory orders.
• Verbal intervention by Japanese officials prevents slow JPY depreciation and adds to EUR/JPY’s downside.
• A drop in German factory orders is reviving fears that the country could slip into recession.

EUR/JPY is trading down nearly half a percent at 162.50 on Monday as it nears the top of its multi-week trading range from early August lows. Bears lead the euro (EUR) following the release of weak macroeconomic data for the region.

The pair faces further headwinds as the Japanese yen (JPY) strengthens following a verbal intervention from Japanese currency diplomat Atsushi Mimura, who, seeing the currency’s recent weakness – particularly against the US dollar (USD), warned against speculative movements. Continued demand for the safe-haven yen amid escalating geopolitical risk stemming from the Middle East conflict further supports the Japanese currency and adds downward pressure to EUR/JPY.

Traders are opting to sell the euro on Monday after eurozone retail sales showed an annual increase of just 0.80% in August, which was weaker than the 1.0% estimate but higher than the 0 .1% from July. Meanwhile, German factory orders fell 5.8 percent on a seasonally adjusted basis in August, which was well below the expected 2.0 percent decline and the upwardly revised 3.9 percent increase from the previous month. The data add more credence to the view that the country is slipping into a recession.

EUR/JPY is likely to see its runaway progress capped by growing expectations that the European Central Bank (ECB) will cut interest rates at its meeting next week. Lower interest rates are usually negative for a currency because they reduce foreign capital inflows.

ECB Governing Council member François Villeroy de Galhau said overnight that the ECB would “very likely” cut interest rates at the meeting, adding that the ECB must pay attention to the risk of overshooting its 2.0% inflation target “from the cause of weak growth and tight monetary policy for too long.” His comments “support the market pricing in a total of 150bp of easing over the next 12 months,” according to analysts at Brown Brothers Harriman (BBH).

Most recently, the euro area’s Harmonized Index of Consumer Prices (HICP) showed prices rose 1.8% in September from 2.2% previously and below the forecast of 1.9%, according to Eurostat. Core HICP fell to 2.7% from 2.8% previously and the same as expected. The below-beating inflation data backs up comments from ECB President Christine Lagarde, who suggested inflation is falling back 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 last week.

EUR/JPY was higher last week after Japan’s new Prime Minister Shigeru Ishiba and his Economy Minister Ryosei Akazawa were cautious before raising interest rates given the “current economic conditions”. This went wrong with markets expecting him to take a neutral approach.