EUR/JPY rises on Eurozone economic optimism, Yen pressured by GDP downgrade

• The Eurozone Sentix Index improves slightly in December, while the ECB’s Isabel Schnabel strengthens growth expectations.
• The unexpected rebound in Germany’s Industrial Production in October supports the Euro.
• The JPY weakens after Japan’s Q3 GDP is revised lower, even as rising wages maintain expectations of a BoJ rate hike.

EUR/JPY trades around 181.10 on Monday, up 0.15% at the time of writing, as fundamental momentum turns more favorable for the Euro (EUR) at the start of the week. Investors are reacting to a series of encouraging indicators from the Eurozone, contrasting with a more complex environment for the Japanese Yen (JPY), caught between a weakening economy and rising expectations of monetary tightening.

The Euro (EUR) receives initial support from the modest improvement in the Eurozone Sentix Investor Confidence Index, which rose to -6.2 in December from -7.4 in November. The Current Situation index also improved to -16.5, while Expectations strengthened significantly to 4.8, signaling a less pessimistic economic outlook.

This recovery comes as comments from European Central Bank (ECB) Executive Board member Isabel Schnabel reinforced the idea that growth forecasts could be revised higher at the December meeting. Schnabel said she feels “comfortable” with markets pricing the next ECB move as a rate hike, giving the Euro an immediate boost.

A stronger-than-expected rise in German Industrial Production further supported the currency. Output increased by 1.8% in October, beating expectations of a 0.4% contraction, after a 1.1% rise in September. These figures help ease concerns about the momentum of the region’s largest economy and tend to add upward pressure on EUR/JPY.

In Japan, the picture is more mixed. Gross Domestic Product (GDP) for the third quarter was revised down to -0.6% from -0.4%, pointing to a deeper contraction. On an annualized basis, the economy shrank 2.3%, its sharpest drop since Q3 2023, weakening the Japanese Yen by raising doubts about Japan’s ability to absorb rapid monetary tightening.

Still, stronger-than-expected growth in nominal wages, up 2.6% in October, continues to fuel speculation of a Bank of Japan (BoJ) rate hike at the December meeting. Persistent wage gains, even in a weakening economy, support the idea that the conditions for policy normalization are gradually taking shape.

At the same time, Japanese Government Bond (JGB) yields remain near multi-year highs, supported by market speculation and by the expansionary fiscal stance of Prime Minister Sanae Takaichi’s government. This environment limits the scale of Japanese Yen depreciation, even if the currency remains under pressure against the Euro.

EUR/JPY Technical Analysis

In the 4-hour chart, EUR/JPY trades at 181.10, little changed on a daily basis, down 1 pip from the day open. The 100-period Simple Moving Average (SMA) rises to 180.66, with price holding above it, which suggests buyers retain control. The SMA’s upward slope reinforces a bullish bias. The Relative Strength Index (RSI) stands at 56, above the neutral 50 line, indicating firm momentum.

A descending trend line from 182.01 caps gains, with immediate resistance at 181.27. On the downside, the rising trend line from 179.78 supports near 180.16. Horizontal support appears at 178.98. A close above the trend barrier could extend the recovery, while a drop through the rising support would open the way to a deeper pullback.

(The technical analysis of this story was written with the help of an AI tool)