EUR/JPY loses momentum above the mid-156.00s, ZEW survey eyed

• EUR/JPY loses ground around 156.72 on the renewed JPY demand.
• Economists stated that expecting the Bank of Japan (BoJ) to abandon the negative interest rate policy later this month was premature.
• The European Central Bank (ECB) is widely expected to hold its Deposit Facility Rate unchanged at 4.0%.
• ECB rate decision will be a closely watched event on Thursday. 

The EUR/JPY cross snaps the two-day winning streak during the early European session on Tuesday. The cautious mood and safe-haven flows due to escalating tensions between the US and Iran-backed Houthi rebels in Yemen lift the Japanese Yen and create the headwind for the cross. EUR/JPY currently trades near 156.72, down 0.43% on the day.

Economists stated that expecting the Bank of Japan (BoJ) to make the tightening move later this month was premature, as new official statistics indicated that the economy contracted more quickly than estimated in the third quarter. Furthermore, market sources said BoJ policymakers see no reason to abandon the negative interest rate policy at its upcoming monetary policy meeting on December 19. This, in turn, drags the Japanese Yen (JPY) lower against the Euro (EUR).

On Friday, the Japanese cabinet office revealed that the nation’s Gross Domestic Product (GDP) for the third quarter (Q3) arrived at -0.7% QoQ versus -0.5% expected and -0.5% prior. Additionally, the annualized GDP contracted 2.9% from the previous reading of 2.1% contraction, and a 2.1% drop was expected.

On the Euro front, traders will closely monitor the European Central Bank (ECB) interest rate decision on Thursday. The ECB is widely expected to hold its Deposit Facility Rate unchanged at 4.0%.

Eurozone inflation has dropped, and the economy may be in a shallow recession, so traders do not believe the ECB’s narrative that interest rates will stay high for some time. The market is now pricing in over 130 basis points (bps) of the rate cut next year, beginning in March.

Moving on, market players will focus on the German and Eurozone ZEW Survey for December. Later this week, the Japanese Tankan Large Manufacturing Index (Q4) and Eurozone Industrial Production will be due on Wednesday. The attention will shift to the ECB rate decision on Thursday. This event could trigger volatility in the market and give a clear direction to the EUR/JPY cross.