• Germany’s stronger business sentiment supports the Euro, but fears of intervention from Japanese authorities are limiting the upside potential of the pair.
• European Central Bank officials continue to expect inflationary pressures to remain above the 2% target despite improving peace prospects in the Middle East.
• Markets remain focused on the Bank of Japan's signals and repeated warnings from Japanese officials regarding the weakness of the Japanese Yen.

EUR/JPY edges lower on Wednesday, trading around 183.55 at the time of writing, down 0.17%, as investors assess the impact of improving economic sentiment in Germany against rising intervention risks in Japan’s foreign exchange market.

Germany’s IFO Business Climate Index rose to 85.6 in June, in line with expectations, from a revised 85 in May. The Current Assessment Index increased to 87, above forecasts of 86.4, while the Expectations Index improved to 84.1 from a revised 83.9 previously, although it missed the 85 consensus estimate. The data confirms a gradual improvement in business confidence in the Eurozone’s largest economy.

The Euro (EUR) is also supported by the European Central Bank’s (ECB) still-cautious stance. ECB Chief Economist Philip Lane said on Tuesday that uncertainty remains elevated despite improving peace prospects in the Middle East and that inflation could stay above the 2% target into the first half of 2027. His comments reinforce expectations that restrictive monetary policy may remain in place for longer.

However, gains in the cross remain capped by developments in Japan. Traders remain on high alert following a discussion between Japanese Finance Minister Satsuki Katayama and US Treasury Secretary Scott Bessent, which has fuelled speculation about potential coordination regarding foreign exchange markets. Japan’s Chief Cabinet Secretary Minoru Kihara also reiterated that authorities would take appropriate action if excessive currency moves occur.

According to Takeru Yamamoto, a trader at Sumitomo Mitsui Trust Bank in New York, the discussions between the United States (US) and Japan may have been intended to signal that the threshold for intervention remains relatively low. Meanwhile, the Bank of Japan’s (BoJ) Summary of Opinions from its June meeting showed that a majority of board members support raising interest rates, arguing that inflation risks are broadening and underlying inflation is moving sustainably toward the 2% target.

OCBC analysts Sim Moh Siong and Christopher Wong noted that USD/JPY’s move back above 160 remains constrained by intervention risks, while MUFG’s Lee Hardman believes that fears of official action and the prospect of a faster pace of monetary tightening from the BoJ are preventing a renewed sharp depreciation of the Japanese Yen (JPY). This combination continues to limit EUR/JPY upside despite a relatively supportive backdrop for the Euro.