EUR weakens amid gloomy outlook in the Eurozone

• The EUR/JPY fell below the 20-day SMA towards the 155.70 area.
• Germany reported lower-than-expected IFO indexes.
• Chinese economic stimulus support the JPY.

On Tuesday, the EUR/JPY cross trades with losses for the second day in a row as the Euro weakened on negative the release of negative IFO indexes. On the other hand, the Japanese Cabinet Office released a fresh inflation forecast while markets await the new Bank of Japan (BoJ) projections on Friday. 

German yields drop amid negative outlook in the Euro area

Germany reported soft IFO indexes. The Business Climate Survey came in at 87.3, lower than the 88 expected and the previous 88.6, and the Current Assessment, dropped to 91.3, below the 93 expected and the last 93.7. The Expectations index was 83.5, higher than the 83 expected but below the previous 83.8.

As a reaction, the EUR is trading losses against most of its rivals, including the USD, GBP, CHF and AUD. In addition, ahead of Thursday’s European Central Bank (ECB) meeting, the 2-year German bond yield dropped to 3.21%, which applied further pressure on the Euro. Regarding the decision, markets await a 25 basis point (bps) hike, but the odds of another hike in September fell to 50% according to the World Interest Rate Probabilities (WIRP) tool. However, the odds of hikes in October and December are largely priced in. In that sense, the bank’s messaging will be critical.

The Japanese Cabinet Office published its longer-term macroeconomic estimates, and in its baseline scenario, it expects headline inflation to be around 0.7% from FY27 to FY32. The report also presented a more optimistic growth scenario in which inflation reaches 2% by FY26 and remains there for the remainder of the 10-year horizon. This comes ahead of Friday’s Bank of Japan (BoJ) meeting, where markets expect policymakers to maintain their dovish stance and updated macroeconomic projections.

In addition, the JPY got a boost on the announcements of China (its leading trading partner) taking up economic policies to bolster economic activity.

EUR/JPY Levels to watch

After losing the 20-day Simple Moving Average (SMA) on the daily chart, further downside may be on the horizon. In addition, technical indicators are pointing south, with the Relative Strength Index (RSI) pointing south near its midline. At the same time, the Moving Average Convergence Divergence (MACD) printed a rising red bar, suggesting that the bears are in command for the short term. 

Support level: 156.00, 155.50, 155.00.
Resistance levels: 156.40 (20-day SMA), 157.00, 157.50. 

EUR/JPY Daily chart