EUR/JPY dives to multi-day low, closer to mid-161.00s amid notable JPY buying

• EUR/JPY attracts sellers for the second straight day amid a goodish pickup in the JPY demand.
• Geopolitical risks, along with bets for additional BoJ rate hike in 2024, lend support to the JPY.
• The ECB’s dovish outlook contributes to the Euro’s underperformance and the ongoing decline.

The EUR/JPY cross turns lower for the second straight day following an Asian session uptick to the 163.20 area and moves away from over a two-week high, around the 163.85-163.90 region touched on Friday. Spot prices drop to a multi-day low, closer to mid-161.00s in the last hour and seem vulnerable to slide further amid a strong pickup in demand for the Japanese Yen (JPY).

Investors remain concerned about the risk of a further escalation of geopolitical tensions in the Middle East, which drives some haven flows towards the JPY and exerts downward pressure on the EUR/JPY cross. The market worries resurfaced after Hamas published an official statement rejecting the terms for a hostage release-ceasefire deal discussed in Doha last week. This, along with hawkish Bank of Japan (BoJ) expectations, underpins the JPY.

Japan’s second-quarter Gross Domestic Product (GDP) print released on Thursday surpassed consensus estimates on a quarterly as well as an annualized basis. Adding to this, data published this Monday showed that Machinery Orders in June surpassed consensus estimates and rose by 2.1% in June 2024. This signaled an improving demand and macroeconomic environment, which should encourage the BoJ to raise interest rates again later this year. 

In contrast, the markets have been pricing in the possibility that the European Central Bank (ECB) will cut rates again in the wake of declining inflation in the Eurozone and downbeat economic outlook. This, in turn, contributes to the shared currency's relative underperformance against its Japanese counterpart and exerts additional pressure on the EUR/JPY cross, though a positive risk tone might cap the JPY and help limit any further losses. 

The market attention now shifts to the release of the flash Eurozone PMIs on Thursday, which should provide fresh insight into the region's economic health and drive the Euro. In the meantime, the JPY price dynamics will continue to play a key role in influencing the EUR/JPY cross in the absence of any relevant market-moving economic data due for release on Monday.