Forex - EUR/JPY drops on European policy uncertainty, Spanish concerns


Shutterstock photo - The euro weakened against the yen on Wednesday as investors sold and jumped to the sidelines to await the European Central Bank's Thursday decision on interest rates, unsure if the monetary authority may warn that uncertainties still plague recovery.

Allegations of corruptions in Spain pressured the single currency lower against the yen.

In U.S. trading on Wednesday, EUR/JPY hit 126.20, down 0.77% and up from a low of 125.94 and off a high of 127.70.

The pair sought to test support at 124.03, Tuesday's low, and resistance at 127.70, the earlier high.

The European Central Bank will address monetary policy on Thursday, and while market talk called for no change to interest rates, concerns ECB President Mario Draghi may suggest headwinds still face the eurozone economy sent the euro sagging.

The euro has strengthened in recent weeks, fueling fears the European Central Bank may find it tough to craft policies that both foster recovery and control inflation.

Meanwhile in Germany, government data revealed that the country's factory orders rose 0.8% in December, missing expectations for a 0.9% gain though much better than November's 1.8% contraction.

While economic indicators such as German business sentiment figures have improved, political developments in Spain are rattling nerves.

Spanish Prime Minister Mariano Rajoy has faced calls to resign in wake of allegations that he and senior officials in the ruling Popular Party took kickbacks, which continued to fuel safe-haven greenback demand on Wednesday.

The euro did see support after a German government spokesman said the single currency was not overvalued and added that exchange rate policy is not an effective way to increase competitiveness.

French President Francois Hollande has made calls for a targeted exchange rate.

The yen, meanwhile, rebounded, erasing losses sustained on a decision by Bank of Japan Governor Masaaki Shirakawa to step down on March 19, three weeks before he was otherwise scheduled to do so.

Shirakawa's exit fueled growing expectations that Japanese Prime Minister Shinzo Abe will name a replacement who favors loosening policy to prioritize growth over inflation, though by Wednesday, investors bought the yen on sentiments that looser policies have already been priced into the market.

The euro, meanwhile, was down against the pound and down against the Canadian dollar, with EUR/GBP trading down 0.51% at 0.8628 and EUR/CAD trading down 0.39% at 1.3470.

On Thursday in the eurozone, both Spain and France will hold auctions of 10-year government bonds, while Germany is to release official data on industrial production.

Elsewhere, the European Central Bank will announce its benchmark interest rate followed by a press conference with President Mario Draghi.

Japan, meanwhile, is to release official data on core machinery orders, a leading indicator of production.

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