Market Data 
- EUR/JPY pares daily losses following the economic data from Europe.
- Eurozone Composite Purchasing Managers Index rose to 50.2 in July, slightly above the expected 50.1 reading.
- The JPY receives support from safe-haven flows due to escalated geopolitical tensions in the Middle East.
EUR/JPY extends its losing streak for the sixth successive day, trading around 156.90 during the early European session on Monday. However, the EUR/JPY cross trims its intraday losses following the release of the Eurozone Producer Price Index (PPI) and the German Purchasing Managers’ Index (PMI) data.
HCOB Eurozone Composite Purchasing Managers Index (PMI) increased to 50.2 in July, slightly above the expected 50.1 reading. Germany’s Composite PMI came in at 49.1, as compared to expected and previous 48.7 readings. Services PMI rose to 52.5 against the expected and 52.0 prior.
In Europe, traders anticipate at least two additional rate cuts by the European Central Bank (ECB) in 2024, with the next likely occurring in September. ECB policymaker Yannis Stournaras mentioned in a Thursday interview that the weak eurozone economy might push inflation below the ECB’s 2% target, reinforcing his prediction of two interest rate reductions this year, according to Reuters.
The Japanese Yen (JPY) gains ground due to rising expectations of the Bank of Japan (BoJ) tightening monetary policy further, which could provide continued support for the JPY in the near term.
The minutes from the Bank of Japan’s June meeting showed that some members voiced concerns about rising import prices due to the recent decline in the JPY, which could present an upside risk to inflation. One member highlighted that cost-push inflation might exacerbate underlying inflation if it leads to higher inflation expectations and wage increases.
Additionally, safe-haven flows provide support for the JPY while putting downward pressure on the EUR/JPY cross, a trend that can be linked to increased geopolitical tensions in the Middle East. On Sunday, an Israeli airstrike hit two schools, causing at least 30 casualties, as reported by Reuters. Furthermore, US Secretary of State Tony Blinken suggested that Iran and Hezbollah might be preparing to launch an attack against Israel as soon as Monday, according to information from three sources briefed on the call, as reported by Axios.
German economy FAQs
The German economy has a significant impact on the Euro due to its status as the largest economy within the Eurozone. Germany’s economic performance, its GDP, employment, and inflation, can greatly influence the overall stability and confidence in the Euro. As Germany’s economy strengthens, it can bolster the Euro’s value, while the opposite is true if it weakens. Overall, the German economy plays a crucial role in shaping the Euro’s strength and perception in global markets.
Germany is the largest economy in the Eurozone and therefore an influential actor in the region. During the Eurozone sovereign debt crisis in 2009-12, Germany was pivotal in setting up various stability funds to bail out debtor countries. It took a leadership role in the implementation of the ‘Fiscal Compact’ following the crisis – a set of more stringent rules to manage member states’ finances and punish ‘debt sinners’. Germany spearheaded a culture of ‘Financial Stability’ and the German economic model has been widely used as a blueprint for economic growth by fellow Eurozone members.
Bunds are bonds issued by the German government. Like all bonds they pay holders a regular interest payment, or coupon, followed by the full value of the loan, or principal, at maturity. Because Germany has the largest economy in the Eurozone, Bunds are used as a benchmark for other European government bonds. Long-term Bunds are viewed as a solid, risk-free investment as they are backed by the full faith and credit of the German nation. For this reason they are treated as a safe havenby investors – gaining in value in times of crisis, whilst falling during periods of prosperity.
German Bund Yields measure the annual return an investor can expect from holding German government bonds, or Bunds. Like other bonds, Bunds pay holders interest at regular intervals, called the ‘coupon’, followed by the full value of the bond at maturity. Whilst the coupon is fixed, the Yield varies as it takes into account changes in the bond’s price, and it is therefore considered a more accurate reflection of return. A decline in the bund’s price raises the coupon as a percentage of the loan, resulting in a higher Yield and vice versa for a rise. This explains why Bund Yields move inversely to prices.
The Bundesbank is the central bank of Germany. It plays a key role in implementing monetary policy within Germany, and central banks in the region more broadly. Its goal is price stability, or keeping inflation low and predictable. It is responsible for ensuring the smooth operation of payment systems in Germany and participates in the oversight of financial institutions. The Bundesbank has a reputation for being conservative, prioritizing the fight against inflation over economic growth. It has been influential in the setup and policy of the European Central Bank (ECB).
