EUR/JPY slumps from seven-week high of 163.50 on firm ECB dovish bets

• EUR/JPY drops sharply to near 162.70 as swelling ECB rate cut bets weigh on the Euro.
• ECB Villeroy warned about rising risks of Eurozone economic slowdown.
• Middle East tensions led to higher safe flows in favor of the Japanese Yen.

The EUR/JPY pair falls sharply from the seven-week high around 163.50 to near 162.70 in Monday’s European session. The cross weakens as the Euro (EUR) faces pressure amid rising speculation that the European Central Bank (ECB) could cut its key borrowing rates further in its policy meeting on October 17.

The ECB cut its Rate on Deposit Facility by 25 basis points (bps) to 3.5% on September 12. This was the ECB’s second dovish decision of its current policy-easing cycle. And, now more rate cuts are expected from the ECB this month as officials worry about growing risks of monetary policy remaining restrictive for too long, which suggests weak economic growth with confidence over inflation declining to the bank’s target of 2%.

This weekend, ECB policymaker and French Central Bank Chief François Villeroy de Galhau said in an interview with La Repubblica, "If we are next year sustainably at 2% inflation, and with still a sluggish growth outlook in Europe, there won’t be any reason for our monetary policy to remain restrictive, and our rates to be above the neutral rate of interest."

Meanwhile, a faster-than-expected slump in German Factory Orders in August has also pointed to weakening demand and the need for further policy-easing. Annually, Factory Orders declined by 3.9% after growing by 4.6% in July. Month-on-month new Factory Orders contracted at a faster-than-expected pace of 5.8%.

On the Tokyo front, conflicts between Israel and Iran in the Middle East region have resulted in safe flows to the Japanese Yen (JPY). The Japanese currency is also strengthened by renewed fears of a possible intervention as suggested by Japan's Finance Ministry's Vice Finance Minister for International Affairs Atsushi Mimura’s speech in Monday’s Asian session.