• EUR/JPY trades slightly higher around 185.40, supported by the persistent weakness of the Japanese Yen.
• Mixed macroeconomic data from the Eurozone keep the outlook for the Euro cautious.
• Investors remain focused on the European Central Bank decision and the political backdrop in Japan.

EUR/JPY trades around 185.40 on Thursday at the time of writing, up 0.10% on the day. The cross is mainly supported by the underperformance of the Japanese Yen, amid rising political uncertainty in Japan, while the Euro shows a more mixed profile due to conflicting macroeconomic signals.

On the Eurozone side, the latest data have delivered contrasting messages. Eurozone Retail Sales fell by 0.5% in December, a much steeper decline than the 0.2% drop expected by market consensus. In addition, November figures were revised lower, with growth now seen at just 0.1% compared with the previously estimated 0.2%. These releases have renewed concerns about the strength of domestic demand and have limited the positive impact of other, more encouraging indicators.

At the same time, German Factory Orders surprised sharply to the upside in December, jumping by 7.8%, while markets had expected a 2.2% contraction. Upward revisions to November data further confirm a firmer momentum in Germany’s industrial sector. However, this improvement has not been enough to offset disappointment stemming from weak consumption, a key factor for the Eurozone growth outlook.

Investors are also cautious ahead of the European Central Bank (ECB) decision, due later in the day. The central bank is widely expected to keep interest rates unchanged, reinforcing its meeting-by-meeting approach. Market attention is mainly on President Christine Lagarde’s rhetoric, as the recent strength of the Euro has revived concerns about deflationary pressures. Any dovish signal could renew downward pressure on the single currency.

On the Japanese front, the Japanese Yen continues to show signs of vulnerability. Markets expect Japanese Prime Minister Sanae Takaichi to unveil a large spending budget after the lower house elections scheduled for February 8. The prospect of stronger fiscal stimulus and a widening budget deficit is weighing on the Japanese currency, even though solid demand at the recent 30-year Japanese Government Bond auction temporarily offered limited support to the JPY.