EUR/JPY extends upside above 173.50, eyes on Eurozone PMI data

• EUR/JPY gains momentum around 173.80 in Wednesday’s European session, up 0.20% on the day.
• Japanese business activity turned contractionary in June, pressuring the JPY. 
• The interest rate differential between the Eurozone and Japan continues to support the Euro for the time being. 

The EUR/JPY cross trades in positive territory for the sixth consecutive day near 173.80 on Wednesday during the early European session. The Japanese Yen (JPY) weakens after the data showed that Japanese business activity turned contractionary in June.

The final reading of Japan’s Services PMI fell to 49.4 in June from 49.8 in May. This figure registered the largest downward movement since January 2022 and among the biggest on record, which exerts some selling pressure on the JPY and acts as a headwind for the pair. On the other hand, the possibility that the Bank of Japan (BoJ) will intervene in the foreign exchange (FX) could underpin the JPY in the near term. 

On the Euro front, the preliminary Eurozone Harmonized Index of Consumer Prices (HICP) inflation eased to 2.5% YoY in June from 2.6% in May. However, these inflation reports were unlikely to encourage the ECB to cut interest rates again at its next policy meeting on 18 July. “Nothing in these figures would make the ECB cut again in July, and we think it’ll be eagerly awaiting data over the summer before seriously debating a next rate cut in September,” said Bert Colijn, senior eurozone economist at the Dutch bank ING.

On Monday, the ECB president Christine Lagarde said that the recent economic developments suggested that further interest rate cuts are not urgent. The divergence in monetary policy between the Eurozone and Japan continues to support the Euro for the time being.