Euro tumbles as Japanese Yen benefits from BoJ rate hike bets

• EUR/JPY falls more than 1% on Monday, pressured by a sharp strengthening of the Japanese Yen.
• Markets now widely expect an interest rate hike in Japan at the September meeting.
• German Industrial Production disappoints in July, while Eurozone investor confidence improves significantly.

EUR/JPY falls 1.11% on Monday and trades around 179.45 at the time of writing. The sharp decline in the cross mainly reflects the strong appreciation of the Japanese Yen (JPY), supported by growing expectations of monetary policy tightening by the Bank of Japan (BoJ).

Investors now appear to have fully priced in a 25-basis-point interest rate hike at the next BoJ meeting, scheduled for September 17-18. Some analysts also see the possibility of a larger move aimed at containing inflation expectations and rising long-term bond yields.

Speculation about a potential intervention by Japanese authorities in the foreign exchange market provides additional support to the Japanese Yen. The combination of prospects for higher interest rates in Japan and intervention risks therefore benefits the Japanese currency and intensifies the downward pressure on EUR/JPY.

On the European side, the Euro (EUR) received mixed macroeconomic signals on Monday. Germany's Federal Statistical Office (Destatis) reported that German Industrial Production declined by 1.1% MoM in July, following stagnation in June, revised from the 0.2% increase initially reported. The reading came in well below the 0.3% growth expected by markets.

On an annual basis, German Industrial Production fell by 1.6% YoY in July, following a 0.5% contraction in June. The figures highlight the persistent difficulties facing the industrial sector of the Eurozone's largest economy.

Data from the rest of the region were more encouraging. The Eurozone Sentix Investor Confidence Index rose to 5.1 in September from 0.9 in August, signaling a significant improvement in investor sentiment.

Meanwhile, Eurozone growth was revised higher. Gross Domestic Product (GDP) expanded by 0.6% QoQ in the second quarter, compared with the previous estimate of 0.4%, marking its strongest quarterly growth rate since the second quarter of 2022. On an annual basis, growth is also revised higher to 1.2% YoY, from the previously estimated 1% and compared with 0.6% in the first quarter.

Despite these more encouraging developments for the Eurozone economy, EUR/JPY dynamics remain dominated on Monday by the strengthening of the Japanese Yen and expectations of imminent monetary tightening in Japan.