Euro steadies against Japanese Yen as German sentiment beats expectations

• EUR/JPY trades without a clear direction around 185.65 on Thursday, with the Euro supported by improving German consumer sentiment.
• German consumer confidence rises sharply for September, comfortably beating market expectations.
• The Japanese Yen remains pressured by fiscal concerns, although expectations of higher interest rates in Japan limit its weakness.

EUR/JPY trades around 185.65 on Thursday at the time of writing, virtually unchanged on the day. The Euro (EUR) benefits from encouraging German data, while the Japanese Yen (JPY) continues to struggle to attract sustained demand amid concerns over Japan’s fiscal position.

Consumer confidence in Germany improves significantly for September. The GfK Consumer Confidence Index rises to -26.6 from -29.4 in August, compared with the market forecast of -29.6.

The figures provide a more encouraging signal for the Eurozone’s largest economy and offer some support to the single currency. Investors now turn their attention to the release of the European Central Bank’s (ECB) latest Monetary Policy Meeting Accounts later on Thursday. Traders will look for fresh clues about the future path of interest rates in the Eurozone.

In Japan, the Japanese Yen remains under pressure due to concerns surrounding the country’s deteriorating public finances, as high levels of national debt and new spending plans fuel worries about Japan’s fiscal trajectory.

The prospect of further monetary tightening by the Bank of Japan (BoJ) limits the Japanese currency’s weakness, however. According to a Reuters poll conducted between August 17 and 24, 57% of economists surveyed expect the BoJ to raise its policy rate by 25 basis points to 1.25% at its September meeting. This represents a significant shift from the July poll, when only 5% of economists expected a September rate hike.

Nevertheless, the still-wide interest rate differential between Japan and other major economies continues to limit the Japanese Yen’s appeal. EUR/JPY therefore remains caught between support for the Euro from improving German data and expectations of further monetary tightening in Japan.

BoJ joins global shift as energy shock keeps inflation risks elevated

Analysts at Rabobank highlight that Bank of Japan board member Himino is now arguing for “a similar pro-active approach as inflationary pressures are picking up, to avoid that policymakers need to hike more aggressively later.” They note this stance fits into a wider pattern, with “several central banks… now flagging tighter policy to stop the energy shock from transforming into broader-based price pressures.” Rabobank cautions that “as we’ve flagged before, time is not on central bankers’ side. The longer the Iran war lasts and the longer disruptions in energy markets persist, the stronger the inflationary impact will be,” reinforcing the case for earlier, rather than delayed, policy tightening.