EUR/JPY edges higher on Eurozone inflation expectations but bearish pressures remain

• EUR/JPY edges higher on a stronger Euro but fails to build on gains due to conflicting data from the Eurozone. 
• The Yen benefits from heightened expectations of the BoJ hiking interest rates in December, increasing inflows into the Yen.
• Lawmakers in Japan are debating a supplementary budget which could deliver cash handouts to households and stoke inflation. 

EUR/JPY edges higher to just below the 160.00 level on Thursday after survey data released by the European Commission suggested stubborn inflation expectations might keep interest rates more elevated than previously thought in the Eurozone. This supports the Euro (EUR) since higher interest rates support foreign capital inflows. However, weaker German inflation data contradicts the survey’s findings and keeps the Single Currency under pressure.

“The European Commission survey was little changed in November and is still consistent with weak growth at best, while the price components suggest that inflationary pressures remain sticky,” said Elias Hilmer, assistant economist at Capital Economics of the data.

The Japanese Yen (JPY), meanwhile, trades mixed. On the one hand it is pressured by political risk due to the ruling party’s tenuous grip on power, whilst on the other hand it remains underpinned by expectations the BoJ will raise interest rates at the end of the year. 

Political risk for the Yen

On Thursday, the Japanese parliament convened an extraordinary session to begin a 24-day deliberation of the supplementary budget as well as laws governing party funding. 

The supplementary budget is expected to help inflation-hit households with cash handouts, whilst policymakers will also debate new laws around political party fundraising after a high profile scandal, in which members of Prime Minister Shigeru Ishiba’s ruling LDP party were found to have amassed private slush funds from fundraising activities, according to Kyodo News. His party rules Japan with a tenuous minority alongside its junior partner, the Momeito party. 

If the budget is passed it could drive more inflation, increasing the chances of the Bank of Japan (BoJ) raising its permanently ultar-low interest rate of 0.25%. Higher interest rates are positive for the Yen because they increase foreign capital inflows. 

BoJ Governor Kazuo Ueda recently repeated that a rate hike in December was still possible, citing concerns over the Yen’s weakness. Markets are now pricing in a roughly 60% chance of a 25 basis point rate hike in Japan next month, up from around 50% just a week ago, according to Trading Economics. 

German Inflation undershoots expectations 

EUR/JPY sees upside curtailed on Thursday after just-released preliminary German Consumer Price Index (CPI) data for November fell below economists expectations, weighing on the Euro. The data contradicts the earlier European Commission survey data and increases the chances the European Central Bank (ECB) will begin a more aggressive phase of interest rate cuts in the Eurozone.   

German headline CPI rose by 2.2% in November, below the 2.3% expected and core CPI remained at 2.4%, falling below the expected 2.6%. 

Traders now await Japanese Tokyo CPI data on Friday for fresh clues as to the direction of monetary policy in Japan, with implications for the direction of the Japanese Yen and its pairs.