EUR/JPY rises to near 173.00 ahead of German HICP data

• EUR/JPY gains ground as traders adopt caution ahead of German August Harmonized Index of Consumer Prices data.
• The ECB kept an optimistic outlook on growth and inflation, reducing expectations for additional rate cuts.
• Traders anticipate that Japanese PM Shigeru Ishiba’s successor may push the BoJ to maintain low interest rates.

EUR/JPY extends its gains for the second successive session, trading around 172.90 during the Asian hours on Friday. The currency cross appreciates as the Euro (EUR) gains ground against the Japanese Yen (JPY) ahead of the German August Harmonized Index of Consumer Prices (HICP) data. Focus will shift toward the University of Michigan (UoM) Consumer Sentiment Index due later in the North American session.

The European Central Bank (ECB) decided to hold “Deposit Facility Rate” at 2.0% and “Main Refinancing Operations Rate” at 2.15% at its September policy meeting on Thursday. The ECB maintained an upbeat view on growth and inflation, dampening expectations for any further cut in borrowing costs. Money markets are currently pricing in 40% odds of one last rate reduction by next spring, less than before the rate decision, according to Reuters.

The EUR/JPY cross also draws support as the Japanese Yen struggles, as traders expect that the successor of the Japanese Prime Minister Shigeru Ishiba might put pressure on the Bank of Japan (BoJ) to keep interest rates low. Ishiba's resignation adds a layer of uncertainty, which could temporarily hinder the BoJ from normalizing policy.

The JPY also faces challenges due to safe-haven outflows amid risk-on sentiment, fueled by rising expectations for three Federal Reserve (Fed) rate cuts this year. Bets on multiple cuts strengthened after US Weekly Initial Jobless Claims climbed to their highest since October 2021, following last week’s weak Nonfarm Payrolls report, overshadowing a hotter-than-expected consumer inflation reading.