EUR/JPY sees downside below 136.00 on potential German energy crisis

• EUR/JPY is expected to display more weakness on a downside move below 136.00.
• An energy supply halt for three days could dampen the already vulnerable German energy market.
• Japan’s dismal PMI numbers despite prolonged dovish BOJ is a big reason to worry.

The EUR/JPY pair has displayed a short-lived pullback to near 136.40 after the shared currency bulls defended an establishment below 136.00. The asset defended further losses on mixed German Purchasing Managers Index (PMI) numbers, released on Tuesday.

The German Services PMI contracted to 48.2 against the forecast of 49 and the former release of 49.9. However, the Manufacturing PMI expanded to 49.8 from the expectations of 48.2 and the prior release of 49.3. It is worth noting that Germany is displaying a decline in the Manufacturing PMI consecutively for the past six months and the unavailability of downside exhaustion could have soared Germany’s recession fears.

Now, the entire focus of the market participants is on energy supply in Germany as Nord Stream 1 pipeline is going under unscheduled maintenance, and the winter season is coming in when demand for energy surges sharply.

Russia will halt natural gas supplies to Europe for the last three days of August to run the unscheduled maintenance under the Baltic Sea to Germany. The unexpected natural gas supply cut to Germany from Nord Stream 1 pipeline will accelerate the imbalance of the energy demand-supply mechanism. Investors should be aware of the fact that Germany is a core European Union (EU) member and an occurrence of an energy crisis in Germany could drag the shared currency.

On the yen front, investors have ignored the downbeat Japan PMI numbers despite the continuation of an ultra-loose monetary policy by the Bank of Japan (BOJ). Dismal PMI numbers by the Western leaders are the consequences of tight monetary policy by the Western central banks. However, the BOJ keeps on flushing liquidity in the economy and dismal PMI numbers at the same time are a big reason to worry.