EUR/JPY surges to 161.00 after flash German inflation data

• EUR/JPY gains sharply after advanced German HICP rose in line with expectations in January.
• The ECB cut its Deposit Facility rate by 25 bps to 2.75% on Thursday.
• The Japanese Yen meets profit booking after outperforming in the past few trading sessions.

The EUR/JPY pair soars to near 161.00 in Friday's North American session. The asset attracts buyers after the release of the flash German Harmonized Index of Consumer Prices (HICP) data for January.

The German inflation came in line with estimates. Month-on-month HICP deflated by 0.2%, as expected, after a 0.7% increase in December. On year, the HICP data rose in line with estimates and the former release of 2.8%. The German Consumer Price Index (CPI) rose at a slower pace of 2.3%, compared to estimates and the former release of 2.6%.

Soft German inflation validates market expectations that the European Central Bank (ECB) will cut interest rates three times more this year. On Thursday, the ECB reduced its Deposit Facility rate by 25 basis points (bps) to 2.75%, as officials were confident that inflationary pressures would sustainably return to the desired rate of 2% this year.

In the press conference after the policy decision, ECB President Christine Lagarde keeps door open for further policy easing. Lagarde said that we are still in "restrictive territory" and it is premature to "anticipate at what point where will stop". However, she avoided providing a pre-defined interest rate cut path and reiterated that we decide meeting by meeting on the basis of data.

Meanwhile, the Japanese Yen (JPY) underperforms across the board as investors take some profit after its recent outperformance. The Yen has performed strongly in the past few trading days on the assumption that the Bank of Japan (BoJ) will hike interest rates further this year. Last week, the BoJ hiked its borrowing rates by 25 bps to 0.5% but didn't provide a specified tight policy path.