• Eurozone Services PMI figures beat expectations, improving the region’s economic outlook.
• European Central Bank officials reiterate a hawkish bias and the need to keep monetary policy unchanged.
• The Japanese Yen benefits from rising expectations of a BoJ rate hike and ongoing safe-haven demand.

EUR/JPY trades around 181.30 on Wednesday at the time of writing, stable on the day. The pair remains caught between a more supportive environment for the Euro (EUR), thanks to stronger economic data, and persistent strength in the Japanese Yen (JPY), underpinned by expectations of tighter monetary policy in Japan and rising geopolitical uncertainty.

Upward revisions drive support for the Euro in recent business activity surveys. The HCOB Services Purchasing Managers Index (PMI) for the Eurozone was revised to 53.6 in November from 53.1 initially, marking a fourth consecutive monthly improvement and the strongest reading since May 2023. France’s Services index was revised to 51.4 from 50.8, while Germany’s rose to 53.1 from 52.7. These figures reinforce the view that European activity is gradually recovering, strengthening the hawkish stance of the European Central Bank (ECB).

In this context, ECB President Christine Lagarde is set to speak before the European Parliament later in the day, where she is expected to defend the appropriateness of keeping interest rates at current levels. The ECB’s Chief Economist Philip Lane delivered a similar message earlier, stating that monetary policy should remain steady unless there is a large and persistent deviation in economic data, adding that reacting to temporary fluctuations would be counterproductive.

However, the Japanese Yen continues to exert pressure on the cross. Investors are increasingly betting on a rate hike by the Bank of Japan (BoJ) following comments from Governor Kazuo Ueda, who said that the likelihood of the central bank’s economic and price projections being met is rising.

This was widely interpreted as the strongest signal that conditions for a rate increase are falling into place. Markets now price roughly an 81% chance of a December hike, according to OCBC, while questioning what the BoJ may do next and whether fiscal authorities will adopt a more prudent stance.

Safe-haven demand is also supporting the Japanese Yen, with geopolitical tensions and the ongoing Russia-Ukraine conflict keeping risk sentiment fragile. Against this backdrop, EUR/JPY remains limited in its recovery attempts.