Euro flat lines above 180.00 vs weak Yen as German political turmoil offsets upbeat PMIs

• EUR/JPY cross struggles to gain any meaningful traction amid mixed fundamental cues.
• German political uncertainty overshadows the upbeat PMI and firming ECB hike bets.
• The BoJ’s dovish outlook continues to undermine the JPY, lending support to the cross.

The EUR/JPY cross seesaws between tepid gains/minor losses through the first half of the European session on Wednesday and moves little following the release of flash Eurozone PMIs. Spot prices, however, remain confined within the previous day's broader range and currently trade just above the 180.00 psychological mark, nearly unchanged for the day.

The preliminary Eurozone HCOB Composite PMI defied expectations and jumped to 53.1 in September, which marks its highest reading since April 2023. Solid growth was registered in both the manufacturing and services sectors, with the latter being a key driver of the improvement in September. Additional details of the survey revealed that firms faced ​the sharpest rise in operating costs in four months, strengthening the case for another interest rate hike by the European Central Bank (ECB) as early as October.

The Euro, however, struggles to attract any meaningful buyers amid political instability in Germany – the Eurozone's largest economy. In fact, German Chancellor Friedrich Merz’s Christian Democratic Union (CDU) suffered humiliating defeats in state elections. Merz’s CDU is currently below the 5% threshold required to sit in parliament, fueling speculation that he could be replaced mid-term in a so-called chancellor swap. This continues to undermine the shared currency and caps the EUR/JPY cross.

The Japanese Yen (JPY), on the other hand, continues with its relative underperformance on the back of the Bank of Japan's (BoJ) dovish rate hike to a 31-year high last week. This, in turn, helps limit the downside for the currency pair. However, intervention fears might hold back JPY bears from placing aggressive bets. The mixed fundamental backdrop, in turn, warrants some caution before positioning for an extension of the recent recovery from the 177.80 area, or the year-to-date low, touched last Monday.