Euro Steadies Against Yen After Better-Than-Expected German Data

The euro traded near 185.65 against the yen on Thursday, roughly flat on the day, after German economic data came in better than expected, lending support to the single currency, while the yen struggled to attract sustained buying amid concerns over Japan's fiscal situation.

**German Data Lends Support**

Germany's GDP grew 0.2% quarter-on-quarter in the second quarter, beating the 0.1% market forecast, while the year-on-year growth rate accelerated to 0.9% from 0.4% previously, well above the 0.6% expected. Meanwhile, Germany's July inflation data also came in firm, reinforcing expectations that the European Central Bank may continue tightening policy, which underpinned the euro. However, the eurozone's overall economic recovery remains uneven, and with Germany's economy having contracted 0.2% in the first quarter, the sustainability of momentum bears watching.

**Yen Faces Multiple Pressures**

On the yen side, concerns over Japan's fiscal health continued to weigh on the currency. In addition, the significant interest rate differential of roughly 250 to 275 basis points between the US and Japan continues to incentivize yen carry trades, with investors borrowing cheap yen to invest in higher-yielding dollar assets, keeping the yen under pressure. The yen had earlier approached the 164 level against the dollar, marking multi-year lows. Although reports suggest US authorities recently conducted coordinated intervention by selling euros and buying yen, which briefly boosted the yen, the effect appears limited, with market focus remaining on rate differentials and Japan's domestic inflation dynamics.

**Key Levels Ahead**

Looking ahead, markets will closely monitor the upcoming eurozone retail sales data, with June figures expected to show year-on-year growth slowing to 1.0% from 1.6% previously. A weaker-than-expected reading could undermine the recent improvement in market sentiment. At the same time, the Bank of Japan's policy stance and inflation data will be key factors influencing the euro-yen cross.