EUR/JPY climbs on Eurozone growth, easing Japanese inflation

• Eurozone private sector activity accelerates in February, supporting the single currency.
• Japanese inflation slows sharply in January, keeping the Bank of Japan’s timing in focus.
• Markets assess the combined impact of monetary policy prospects in Europe and Japan on the cross.

EUR/JPY trades around 182.75 on Friday at the time of writing, up 0.13% on the day, supported by stronger-than-expected activity data from the Eurozone and a slightly softer Japanese Yen (JPY) following cooling inflation figures.

The preliminary HCOB Eurozone Composite Purchasing Managers Index (PMI) comes in at 51.9 in February, above expectations of 51.5 and the previous reading of 51.3. Overall business activity expands at a faster pace, driven by simultaneous improvements in both manufacturing and services. The Manufacturing PMI returns to expansion territory at 50.8 from 49.5 previously, while the Services PMI rises to 51.8, although it falls slightly short of market forecasts of 52. These figures reinforce the view of a gradual economic recovery in the Eurozone at the start of the first quarter.

On the institutional front, European Central Bank (ECB) President Christine Lagarde says she expects to remain in office until October 2027, according to the Wall Street Journal. She declines to comment directly on speculation about a potential early resignation but notes that the World Economic Forum is among the options she may consider after leaving the central bank. This communication helps limit political uncertainty surrounding the ECB, as investors remain attentive to the future path of monetary policy.

In Japan, the latest inflation data point to a clear moderation in price pressures. The National Consumer Price Index (CPI) rises 1.5% YoY in January, down from 2.1% in December, marking the slowest pace since March 2022. Core CPI, excluding fresh food, increases 2%, easing from 2.4% previously and matching expectations. The so-called core-core measure, which excludes fresh food and energy, also slows to 2.6% from 2.9%.

According to the Danske Bank research team, this moderation in underlying inflation, now at its lowest level in two years, could influence the Bank of Japan’s (BoJ) normalization timeline. Analysts highlight that despite solid domestic demand, as reflected in recent PMIs, and an easing fiscal stance, relatively soft core inflation complicates the decision to raise rates in the near term.

Meanwhile, Japan’s Prime Minister Sanae Takaichi says she intends to steadily reduce the debt-to-GDP ratio and restore fiscal sustainability, helping to ease some market concerns. However, the combination of cooling inflation and uncertainty surrounding the pace of monetary tightening limits support for the Japanese Yen, allowing EUR/JPY to maintain a modest bullish bias in the short term.