• EUR/JPY corrects sharply to 156.00 as the market mood turns extremely cautious.
• Eurozone inflation is almost three times the desired rate of 2%, therefore, further policy-tightening seems warranted.
• The BoJ provided more flexibility to the YCC and delivered a message that the central bank is exiting from the expansionary policy.

The EUR/JPY pair drops swiftly near 156.00 as the Eurostat reports that June’s Producer Price Index (PPI) deflated in June beyond expectations. The monthly PPI contracted by 0.4% while investors were anticipating a deflation at a pace of 0.2%. It seems that producers are passing on the impact of the decline in input prices to end consumers.

Going forward, investors will focus on German Factory Orders data for June. Monthly factory orders are seen contracting by 2.0% from May’s expansion pace of 6.4%. It seems that the manufacturing sector is feeling the heat of an aggressive rate-tightening cycle by the European Central Bank (ECB).

Apart from the German factory orders, Eurozone Retail Sales for June will also hog the limelight. Monthly consumer spending momentum is seen expanding at a pace of 0.2% vs. a stagnant performance being reported in May. Annual Retail Sales are expected to deliver a decline in contraction to 1.7%

ECB President Christine Lagarde raised interest rates by 25 basis points (bps) last week to 4.25% and commented that the central bank will remain dependent on incoming data for further policy action. Inflationary pressures are almost three times the desired rate of 2%, therefore, further policy-tightening seems warranted.

Meanwhile, the Japanese Yen is performing better against the Euro due to a cautious market mood and a strong message delivered by the Bank of Japan (BoJ) that it is considering an exit from the ultra-dovish policy stance. In the monetary policy meeting announced last week, the BoJ provided more flexibility to the Yield Curve Control (YCC).