EUR/JPY is trading a quarter of a percent higher at just above 161.00 on Friday, after the release of Eurozone inflation data for July met economists’ expectations. Lower-than-expected German and Spanish inflation released prior to the region-wide figure, on Thursday, had set the scene for a similar below-expectations fall in Eurozone-wide inflation. However, this was not in the end the case, and the Euro rebounded on the news. The annual Consumer Price Index (CPI) in the Eurozone rose 2.2% in August in line with estimates, and was lower than the 2.6% rise reported in July. Although this marked the lowest increase in Eurozone consumer prices since July of 2021 and contrasted with the rest of the year – in which inflation hovered between 2.4% – 2.6% – that it was in line with estimates was supportive for the Euro and EUR/JPY. The data is unlikely to change the European Central Bank’s (ECB) gradual and cautious, data-dependent stance on reducing interest rates, according to Nordea Bank. That the ECB will probably not be cutting interest rates aggressively is propping up the Euro, since higher-for-longer interest rates attract greater inflows of foreign capital. “Headline inflation dropped to 2.2% y/y in August – the closest it has been to the ECB’s inflation target since 2021 – but risks remain: Wage growth remains high and will keep core inflation sticky for the rest of this year,” says Anders Svendson, Chief Analyst at Nordea Bank. One reason for the ECB’s “cautious and gradual” approach is services inflation which remains elevated at 4.2% and is unlikely to fall much before 2025 given the generous forecast for wage increases during the second half of 2024. “Negotiated wage growth will stay high in the second half of the year, which is likely to keep service price inflation high as well,” says Svendson. In addition, core CPI inflation remains relatively high at 2.8% and is “proving sticky” according to the analyst. EUR/JPY may remain range bound as the Japanese Yen (JPY) gains support from recent Japanese data. This showed inflation in Tokyo, as measured by the Tokyo Consumer Price Index rising above economists’ estimates. Annual flash Tokyo CPI ex fresh food for July came out at 2.4% compared to 2.2% in the previous month and beating expectations of 2.2%, according to data from the Statistics Bureau of Japan released on Thursday. This suggests the possibility that Japan-wide inflation could show a similar rise. This, in turn, would support the case for the Bank of Japan (BoJ) pressing ahead with raising interest rates in Japan, supporting the Yen in the process.Employment data released at the same time as the Tokyo CPI, however, was not as strong. The Japanese Unemployment Rate unexpectedly rose to 2.7% in July from 2.5% in June. Analysts at Capital Economics dismissed the rise in unemployment, however, saying “our conviction that the Bank (BoJ) will press ahead with another rate hike is growing.” “The jump in the unemployment rate in July is a lagged response to the weakness in economic activity around the turn of the year,” said Marcel Thieliant, Head of Asia-Pacific at Capital Economics. “Given that the July industrial production and retail sales data are pointing to another decent rise in Q3 GDP, the labor market should tighten again before long. And with the Tokyo CPI suggesting that underlying inflation is leveling off around the Bank of Japan’s 2% target,” he added. More By This Author:Gold Rises On Nvidia Disappointment, Revival Of China Demand EUR/GBP Price Analysis: Bears Push Pair Near 0.8400, Outlook Negative US Dollar Selling Pressure Eases, Dovish Fed Bets Steady