- EUR/JPY maintains its position amid rising odds of the BoJ rate hikes.
- Risk aversion increases due to rising trade tensions and economic uncertainty following US tariffs on steel and aluminum imports.
- The Euro struggles as the likelihood of deeper ECB rate cuts increases.
EUR/JPY remains steady after gaining ground in the previous session, trading around 156.60 during the Asian hours on Tuesday. The downside risks for the EUR/JPY cross seem possible as the Japanese Yen (JPY) gains ground against its peers, fueled by growing expectations that the Bank of Japan (BoJ) will continue raising rates this year.
The Bank of Japan Governor Kazuo Ueda and Deputy Governor Himino recently indicated the potential for another interest rate hike if economic conditions and inflation align with the central bank’s projections. Last week, BoJ board member Naoki Tamura emphasized the need to raise the policy rate to at least 1% in the latter half of fiscal 2025. Moreover, stronger-than-expected wage and household spending data have reinforced the hawkish stance on monetary policy.
Furthermore, heightened risk aversion may strengthen the safe-haven JPY while weighing on the risk-sensitive Euro, exerting downward pressure on the EUR/JPY pair. US President Donald Trump imposed a flat 25% tariff on steel and aluminum imports on Monday, removing all exemptions and nullifying previous trade agreements with key United States (US) allies. The move is intended to support struggling domestic industries but increases the risk of a broader trade conflict.
German Chancellor Olaf Scholz stated earlier that the European Union (EU) could react “within an hour” if the US imposes the proposed tariffs on European goods. Separately, Bernd Lange, head of the European Parliament’s trade committee, suggested that to avoid a trade war, the EU is open to reducing its 10% import tax on vehicles to a rate closer to the 2.5% tariff imposed by the US.
The Euro faces challenges amid rising concerns over potential deflationary pressures in the Eurozone due to expected US tariffs have intensified odds of deeper ECB rate cuts, with markets now predicting the deposit rate could fall to 1.87% by December.
Risk sentiment FAQs
In the world of financial jargon the two widely used terms “risk-on” and “risk off” refer to the level of risk that investors are willing to stomach during the period referenced. In a “risk-on” market, investors are optimistic about the future and more willing to buy risky assets. In a “risk-off” market investors start to ‘play it safe’ because they are worried about the future, and therefore buy less risky assets that are more certain of bringing a return, even if it is relatively modest.
Typically, during periods of “risk-on”, stock markets will rise, most commodities – except Gold – will also gain in value, since they benefit from a positive growth outlook. The currencies of nations that are heavy commodity exporters strengthen because of increased demand, and Cryptocurrencies rise. In a “risk-off” market, Bonds go up – especially major government Bonds – Gold shines, and safe-haven currencies such as the Japanese Yen, Swiss Franc and US Dollar all benefit.
The Australian Dollar (AUD), the Canadian Dollar (CAD), the New Zealand Dollar (NZD) and minor FX like the Ruble (RUB) and the South African Rand (ZAR), all tend to rise in markets that are “risk-on”. This is because the economies of these currencies are heavily reliant on commodity exports for growth, and commodities tend to rise in price during risk-on periods. This is because investors foresee greater demand for raw materials in the future due to heightened economic activity.
The major currencies that tend to rise during periods of “risk-off” are the US Dollar (USD), the Japanese Yen (JPY) and the Swiss Franc (CHF). The US Dollar, because it is the world’s reserve currency, and because in times of crisis investors buy US government debt, which is seen as safe because the largest economy in the world is unlikely to default. The Yen, from increased demand for Japanese government bonds, because a high proportion are held by domestic investors who are unlikely to dump them – even in a crisis. The Swiss Franc, because strict Swiss banking laws offer investors enhanced capital protection.
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