EUR/JPY extends its upside above 163.00 following German GDP data

The EUR/JPY cross extends its upside near the 163.00 psychological barrier during the early European session on Friday. The pair edges higher as German GDP for Q4 matched the market estimation. The cross currently trades around 163.07, gaining 0.12% on the day. 

The latest data from the Federal Statistics Office of Germany on Friday showed that the German Gross Domestic Product for the fourth quarter (Q4) contracted by 0.3% QoQ and 0.2% YoY in Q4. Both figures were in line with market expectations. 

On Thursday, the Eurozone Composite PMI for February came in higher than the consensus forecast, improving to 48.9 from 47.9 in January. The improvement in the Composite PMI was primarily due to an increase in the services PMI, which climbed to 50.0 in February from 48.4 the previous month. The Manufacturing PMI declined to 46.1 in February from 46.6 in January, worse than the expectation of 47.0. This report suggests that the Eurozone manufacturing sector remained in deep contraction territory in the first quarter of 2024. 

The minutes of the European Central Bank’s (ECB) January meeting illustrate the currently ongoing shift in the ECB’s inflation assessment, but the very cautious and gradual shift suggests that rate cuts in spring are highly unlikely. Instead, the ECB will want to wait until first-quarter data confirms receding inflationary pressure, a modest economic recovery, and no acceleration of wage growth to slightly reduce the current monetary policy restrictiveness. 

On the other hand, the verbal intervention by Japanese authorities might cap the downside of the Japanese Yen (JPY). Japan's Ministry of Finance and Bank of Japan (BoJ) governor have warned that they are closely watching the FX rate and would intervene in the market to prevent further weakening in the home currency if needed. Additionally, the escalating geopolitical tensions in the Middle East might boost the safe-haven currency JPY and act as a headwind for the EUR/JPY cross. 

Moving on, market participants will focus on the German IFO survey for February and ECB's Schnabel speech, due on Friday. Next week, the Japanese National Consumer Price Index (CPI) will be released. 

(This story was corrected on February 23 at 08:32 GMT to say, in the second bullet point and the second paragraph, that German GDP contracted in Q4, not grew.)