EUR/JPY declines on fragile risk tone, German inflation in focus

• The EUR/JPY exchange rate ticks slightly lower on Tuesday amid a cautious risk tone in financial markets.
• Investors remain wary due to the lack of clarity surrounding the timing of the next interest rate hike in Japan.
• Inflation data due later in the day from Germany could influence the Euro’s near-term direction.

EUR/JPY trades around 183.10 on Tuesday at the time of writing, down 0.10% on the day, as the Euro (EUR) weakens modestly against the Japanese Yen (JPY) in an environment marked by a generally fragile market sentiment. Currency traders remain torn between persistent uncertainty over Japanese monetary policy and relatively supportive conditions for the single currency.

Bank of Japan (BoJ) Governor Kazuo Ueda reiterated on Monday that the central bank will continue raising interest rates if economic and price developments evolve in line with its projections, pointing to the continuation of a sustained inflation cycle. However, most analysts believe that the next rate increase is unlikely to occur before mid-year, once the spring shunto wage negotiations confirm solid pay growth. This uncertainty continues to limit the Japanese Yen’s ability to stage a meaningful rebound.

On the European side, the Euro is weighed down by the macroeconomic indicators released earlier in the day. The Eurozone HCOB Services Purchasing Managers Index (PMI) was revised slightly lower to 52.4 in December, pointing to a moderate slowdown in services activity momentum, while the HCOB Composite PMI for December was also revised down to 51.5 from an initial estimate of 51.9, reinforcing signs of softer overall activity across the bloc.

Markets await the release of Germany’s preliminary Harmonized Consumer Prices Index (HCPI) for December. A stronger inflation reading, with the HICP expected to rise by 0.4% on a monthly basis, could provide some support to the Euro in the near term.

The global geopolitical environment also remains a key factor for currency markets. Rising tensions between Russia and Ukraine continue to weigh on sentiment surrounding the Euro, as the Eurozone remains heavily dependent on Russian energy imports. At the same time, the recent escalation in Latin America, following a large-scale US military operation against Venezuela, has added to broader geopolitical uncertainty, which supports the Japanese Yen, seen as a safe-haven asset.