EUR/JPY dives to two-week low, around 157.25 area after disappointing Euro Zone PMIs

• EUR/JPY drifts lower for the second straight day and drops to a two-week trough on Wednesday.
• The dismal German PMIs weigh heavily on the shared currency and exert pressure on the cross.
• Looming recession risk, intervention fears benefit the JPY and also contribute to the offered tone.

The EUR/JPY cross extends the overnight retracement slide from the vicinity of mid-159.00s, or its highest level since September 2008 and remains under heavy selling pressure for the second successive day on Wednesday. The downward trajectory picks up pace during the early European session and drags spot prices to a two-week low, around the 157.25 region in the last hour.

The shared currency weakens across the board after a preliminary report showed that business activity in Germany contracted at the fastest pace for more than three years in August. In fact, the HCOB Flash German Composite PMI missed estimates and fell to 44.7, hitting its lowest since May 2020 and reviving recession fears. Furthermore, business activity in the services sector contracted for the first time in eight months and the manufacturing PMI remained deep in contraction territory.

The data points to the worsening economic conditions in the Euro Zone's largest economy and fuels speculations that the European Central Bank (ECB) will halt its streak of nine consecutive rate hikes in September. In fact, money market futures now price just a 40% chance of a 25 bps lift-off from the ECB in September as compared to roughly a 60% chance priced in ahead of the data. This, in turn, is seen weighing on the Euro and exerting downward pressure on the EUR/JPY cross.

The Japanese Yen (JPY), on the other hand, attracts some haven flows in the wake of growing worries about a deeper global economic downturn. Apart from this, intervention fears underpin the JPY and contribute to the offered tone surrounding the EUR/JPY cross. That said, a move dovish stance adopted by the Bank of Japan (BoJ) might keep a lid on any meaningful gains for the JPY and warrants some caution before confirming that the cross has topped out in the near term.

Technical levels to watch