Euro treads water vs Yen as Japanese inflation, European PMIs offset each other

• The Japanese Yen benefits from an acceleration in Japan’s underlying inflation in July, strengthening expectations of higher interest rates in Japan.
• Manufacturing activity in the Eurozone and Germany surprises to the upside in August, providing support to the Euro.
• Diverging signals on both sides of the pair keep EUR/JPY virtually unchanged around 185.70 on Friday.

EUR/JPY trades around 185.70 on Friday at the time of writing, virtually unchanged on the day. The Japanese Yen (JPY) gains some support from firmer Japanese inflation data, but the move is offset by resilience in the Euro (EUR) following better-than-expected activity indicators in the Eurozone.

In Japan, the core Consumer Price Index (CPI), which excludes fresh food, rises 1.8% YoY in July, following a 1.6% increase in June. This marks its fastest pace of growth since January. A measure excluding volatile components also points to persistent inflationary pressures, accelerating from the previous month.

These figures reinforce expectations that the Bank of Japan (BoJ) could continue normalizing its monetary policy. Firmer underlying inflation could give the central bank more room to raise interest rates, a prospect that supports the Japanese Yen and limits the upside in EUR/JPY.

However, the resilience of the Euro prevents the pair from declining significantly. In the Eurozone, the preliminary HCOB Manufacturing Purchasing Managers Index (PMI) rises to 52.8 in August from 51.9 previously, beating expectations of 51.8. The Services PMI remains unchanged at 51.7, slightly above the 51.5 forecast, while the Composite PMI improves to 52.1 from 52, also exceeding the market consensus of 51.7.

German data paint a more mixed picture, although the sharp improvement in the manufacturing sector stands out. Germany’s Manufacturing PMI jumps to 54.1 in August, its highest level in 51 months, from 52.2 previously and above the 52 expected. In contrast, the Services PMI falls to 48.5 from 49.8, while economists had expected a return to expansion territory at 50.1. Germany’s Composite PMI consequently eases to 51 from 51.3, missing expectations of 51.3.

EUR/JPY therefore remains caught between opposing forces on Friday. Growing expectations of further monetary policy normalization in Japan support the Japanese Yen, while the positive surprise from European manufacturing activity underpins the Euro, leaving the pair broadly balanced around 185.70.