EUR/JPY declines as stronger Yen on intervention risks offsets ECB tightening expectations

• EUR/JPY declines around 183.50 on Wednesday, pressured by renewed strength in the Japanese Yen.
• Markets remain alert to the risk of further intervention by Japanese authorities.
• Eurozone inflation data reinforces expectations of monetary tightening by the European Central Bank.

EUR/JPY trades around 183.50 on Wednesday at the time of writing, down 0.61% on the day, as the Japanese Yen (JPY) benefits from stronger demand amid fears of intervention by Japanese authorities in the foreign exchange market.

Traders remain cautious after data released last week by the Bank of Japan (BoJ) showed that the Ministry of Finance (MOF) may have spent around ¥5.48 trillion, or nearly $35 billion, to support the Japanese Yen after USD/JPY broke above the psychological 160.00 threshold. Several analysts also estimate that the recent decline in USD/JPY could be consistent with another implicit intervention by Japanese authorities.

Investor caution is further reinforced by comments from Japanese Finance Minister Satsuki Katayama, who reiterated earlier this week that Tokyo remains ready to take “decisive measures” against speculative moves in the foreign exchange market, in line with the agreement signed with the United States (US) last year. A former Japanese official also warned that further action could take place during the Golden Week holiday period.

However, despite these signals, JPY bulls still refrain from placing overly aggressive bets in the absence of official confirmation of a recent intervention by Japanese authorities.

On the European side, the latest macroeconomic data provides mixed support to the Euro (EUR). Eurostat reported on Wednesday that the Eurozone Producer Price Index (PPI) accelerated to 2.1% YoY in March, compared with a 3% drop previously and above market expectations. On a monthly basis, the indicator jumped 3.4%, marking its strongest increase in nearly four years.

These figures fuel concerns over persistent inflationary pressures and strengthen expectations of an interest rate hike by the European Central Bank (ECB). Bundesbank President Joachim Nagel also stated on Monday that a rate increase as early as June remains possible if the inflation outlook does not improve rapidly.

At the same time, activity indicators continue to point to an economic slowdown in the region. The Eurozone final HCOB Services Purchasing Managers Index (PMI) was revised slightly higher to 47.6 in April from the preliminary estimate of 47.4, but remains well below the 50 threshold separating expansion from contraction. The Composite PMI also indicates a contraction in activity at 48.8.

BNY noted that this combination of weakening economic activity and persistent inflationary pressures increases stagflation risks in the region. The bank believes that if markets start to view that the ECB may need to limit monetary tightening due to slowing growth, the Euro (EUR) could underperform against its major peers.