Euro Eases Versus Yen as Markets Eye BoJ and German CPI

Key Moments

EUR/JPY Under Pressure as Yen Outperforms

The Euro (EUR) is lower by 0.1% against the Japanese Yen (JPY), trading close to 185.20 during the European session on Monday. The currency pair is under downward pressure as the Yen outperforms other major currencies amid growing concern that the Bank of Japan (BoJ) could lift interest rates at its September policy meeting.

Markets Strongly Price In BoJ Tightening

According to Commerzbank, expectations in financial markets have shifted firmly toward a near-term rate increase by the BoJ, with “the implied probability of an interest rate hike in September” having “recently risen again and now” standing “at around 84%.” The bank emphasizes, however, that “only the Bank of Japan has yet to make any clear statements regarding the timing of its next move,” noting that Deputy Governor Himino “preferred in his speech yesterday not to get specific just yet,” a reminder of the ongoing divergence between market pricing and official guidance.

Euro Trades Cautiously Ahead of German HICP

The single currency is trading with caution ahead of the release of Germany’s Harmonized Index of Consumer Prices (HICP) for August, scheduled for publication at 12:00 GMT. Preliminary data are expected to show an acceleration in annual inflation to 3% Year-on-Year (YoY), compared with 2.8% in July.

Any indication that price pressures in Germany are picking up could strengthen expectations that the European Central Bank (ECB) will raise interest rates at its meeting next month.

ECB Expectations Center on September Hike

Financial market participants appear broadly confident that the ECB will proceed with an interest rate increase in September. Analysts at Danske Bank observe that “the market is now nearly fully priced for a 25bp rate hike at the September meeting,” interpreting this as evidence of still-elevated inflation expectations despite signs of improved sentiment across the Euro area.

However, Danske Bank argues that recent data – which include energy-driven increases in headline French and Spanish HICP, alongside subdued core momentum and weaker French GDP – are “marginally dovish versus market pricing.” The bank further notes that “the decline in firms’ selling price expectations supports our view that the September meeting will be the final hike for now,” and it anticipates that the ECB will deliver only one more 25bp increase before moving to a pause.

Investors will also be watching the Eurozone HICP data for July, which are due on Tuesday, as an additional gauge of the region’s inflation dynamics.

German HICP: Definition and Release Details

The Harmonized Index of Consumer Prices (HICP), published monthly by the German statistics office Destatis, is a measure of consumer price inflation compiled using a methodology harmonized across all European Union (EU) member states to allow cross-country comparisons. The Year-on-Year (YoY) figure measures the change in prices relative to the same month a year earlier.

In general, a higher HICP reading is considered supportive for the Euro (EUR), while a lower reading tends to be negative for the currency.