EUR/JPY breaks below 173.00 as Fitch Ratings downgrades France's credit rating

• EUR/JPY depreciates as Fitch Ratings downgraded France's credit rating from "AA-" to "A+."
• The Japanese Yen may struggle amid expectations that the BoJ will keep interest rates unchanged on Friday.
• Traders await the upcoming Japan's trade balance and inflation data later this week.

EUR/JPY loses ground after two sessions of gains, trading around 173.00 during the Asian hours on Monday. The currency cross faces challenges as the Euro (EUR) weakens against its peers after Fitch Ratings downgraded France's credit rating on Friday from "AA-" to "A+," marking the country's lowest rating on record from a major agency amid mounting political turmoil.

The Fitch Ratings agency took this move following the resignation of Prime Minister François Bayrou after losing a parliamentary confidence vote over his proposed austerity budget. Heightened political uncertainty in France could weigh on the euro in the near term.

The downside of the EUR/JPY cross could be limited as the Japanese Yen (JPY) may come under pressure amid expectations that the Bank of Japan (BoJ) will keep interest rates unchanged at 0.5%, given mixed economic signals and political uncertainty. Trade volumes could be low as Japanese markets are observing a holiday on Respect-for-the-Aged Day.

Market participants expect that the successor of the Japanese Prime Minister Shigeru Ishiba might put pressure on the BoJ to keep interest rates low. Ishiba has announced his resignation, citing growing pressure following last year's election loss and escalating divisions within the ruling party. His resignation adds a layer of uncertainty, which could temporarily hinder the BoJ from normalizing policy.

Traders will likely observe the upcoming trade data, with Merchandise Trade Balance Total for August due on Wednesday, which is expected to remain subdued. Friday will bring inflation figures, where core CPI is projected to ease to 2.7%, the lowest level since November 2024.