Euro edges lower as soft Eurozone data and BoJ tightening expectations support Japanese Yen

• Mixed European economic figures weigh on EUR/JPY, which falls 0.13% on Friday.
• September brought a 0.7% fall in Eurozone Retail Sales, considerably steeper than the 0.1% decline forecast.
• Prospects of a December interest rate rise in Japan, alongside wider risk aversion, lend support to the Japanese Yen.

Mixed Eurozone economic figures are weighing on EUR/JPY on Friday, with the pair down 0.13% on the day at around 176.80 at the time of writing. Meanwhile, expectations of additional interest rate rises by the Bank of Japan (BoJ), together with a broader retreat from risk, are supporting the Japanese Yen (JPY).

Friday's European releases indicate softer consumer demand. Eurostat reported a 0.7% MoM fall in Eurozone Retail Sales for September, after August's decline was revised to 2%. Markets had anticipated a much smaller contraction of 0.1%. Annual Retail Sales growth eased to 0.4% in September from 1.3% a month earlier, also falling short of the 0.6% consensus forecast. The data point to continued weakness in European household demand, which could weigh on the region's growth prospects and constrain any recovery in the Euro (EUR).

Earlier figures showed German Industrial Production rising 0.7% MoM in September. Although this exceeded forecasts for no change, growth slowed from August's revised 1%. Strong results in the automotive and pharmaceutical sectors accounted for most of the increase, whereas construction and the manufacture of machinery and equipment declined.

Turning to monetary policy, energy inflation could affect wage bargaining and price-setting throughout the economy, European Central Bank (ECB) Chief Economist Philip Lane said on Friday. While reiterating that inflation must return to the ECB's target within one to two years, he underlined the role of monetary policy in containing spillovers from inflationary pressures.

Financial conditions had also tightened, Lane observed. He added that fiscal policy had proved more expansionary than anticipated but was likely to turn more restrictive from next year. Taking a cautious approach to forthcoming ECB decisions, he highlighted the importance of collecting further information before the December meeting.

Expectations for Japanese monetary policy remain a source of support for the Japanese Yen. Released on Thursday, the minutes of the BoJ's September meeting revealed agreement among policymakers that interest rates should continue to rise gradually, with the degree of monetary accommodation adjusted accordingly.

A quicker pace of monetary tightening was advocated by some members, strengthening market expectations that another interest rate rise could come as early as December. As investors weigh the two central banks' differing policy paths, these prospects underpin the Japanese currency, particularly against the Euro.

At the same time, the wider retreat from risk continues to bolster demand for the Japanese Yen, which is traditionally regarded as a safe-haven currency. Defensive flows, alongside monetary policy expectations, are therefore maintaining pressure on EUR/JPY.