EUR/JPY comes out of woods as more rate hikes from ECB look warranted

• EUR/JPY resumes its upside journey as Eurozone economic data support more interest-rate hikes from the ECB.
• In spite of higher interest rates, Eurozone GDP managed to come out of contraction and outperformed expectations.
• The Japanese Yen is facing the wrath of the BoJ policy shift.

The EUR/JPY pair manages to resume its upside journey after a time correction move to near 156.50. The asset looks set to surpass a weekly high of 157.24 as Eurozone economic data suggests that the European Central Bank (ECB) cannot pause the current tightening spell.

ECB President Christine Lagarde commented on July 27 while announcing the interest rate policy that further policy action will be data-dependent. Eurozone Gross Domestic Product (GDP) and inflation data released on Monday conveyed that the ECB cannot shift policy to neutral at least for now.

The performance of the Eurozone economy remained upbeat in the April-June quarter as economic activities grew by 0.3% against a contraction of 0.1% and investors were hoping for an expansion by 0.2%. On an annualized basis, GDP expanded at a pace of 0.6% vs. expectations of 0.4%.

In spite of higher interest rates, Eurozone GDP managed to come out of contraction and outperformed expectations, which shows its resilience. Apart from that, annual headline inflation landed at 5.3% higher than expectations of 5.2% but remained below June’s print of 5.5%. Core inflation that excludes volatile oil and food prices remained unchanged at 5.5% and higher than the forecast of 5.5%.

Sticky inflationary pressures and upbeat GDP performance indicate that consumer spending is steady and can push inflation higher.

Meanwhile, the Japanese Yen is facing the wrath of the Bank of Japan (BoJ) policy shift. BoJ Governor provided more flexibility to the Yield Curve Control (YCC) keeping interest rates steady, which would ease bond-buying operations by the central bank. Also, it delivered a strong message that the central bank is considering an exit from its long ultra-dovish policy.