EUR/JPY recovers sharply at around 144.00 on firmer Japan GDP data, ECB policy eyed

• EUR/JPY has rebounded firmly after dropping to near 144.00 despite upbeat Japan’s GDP data.
• The quarterly and annual data have landed at 0.9% and 3.5% respectively.
• A hawkish stance is expected on interest rates by the ECB.

The EUR/JPY pair has bounced back quickly after slipping to near 144.00. The cross turned volatile after the Japanese Cabinet Office releases Gross Domestic Product (GDP) data. Japan’s GDP data has landed higher than expectations significantly.

The economic data has improved meaningfully to 3.5% against the expectations and the prior print of 2.9% and 2.2% respectively on an annual basis. Also, the quarterly data has been recorded higher at 0.9% against the forecasts of 0.7% and the prior release of 0.5%.

The asset is expected to remain bullish on a broader note as the market participants are expecting an escalation in European Central Bank (ECB)-Bank of Japan (BOJ) policy divergence. The Eurozone economy is going through the double threat of accelerating price pressures and bleak economic growth.

ECBs preferred inflation tool, Harmonized Index of Consumer Prices (HICP) landed at 9.1% for July as the central bank is responsible for a delayed response. The Russia-Ukraine tussle restricted the ECB to sound hawkish as the decision of hiking interest rates at times when supply chain bottlenecks were at a peak could have harmed the economic activities dramatically.

Meanwhile, soaring energy prices after Russia cut off the gas supply from its major Nord Stream 1 pipeline under the Baltic Sea to Germany have trimmed growth prospects significantly. Also, the winter season is arriving which will demand more energy to run heating appliances.

In today’s session, the interest rate decision by ECB President Christine Lagarde will be keenly watched. As per the consensus, the ECB will hike its interest rates by 75 basis points (bps). An occurrence of the same will lift the interest rates to 1.25%. This will widen the ECB-BOJ policy divergence and may weaken the yen bulls further.