- EUR/JPY surrenders a major part of Asian session gains, though the downside seems limited.
- Hopes for a US-Japan trade deal and BoJ rate hike bets underpin the JPY, capping the cross.
- The risk-on impulse acts as a headwind for the safe-haven JPY and could support spot prices.
The EUR/JPY cross struggles to capitalize on its modest Asian session gains and attracts some intraday sellers in the vicinity of mid-162.00s on Wednesday. Spot prices retreat to the lower end of the daily range, around the 161.80-161.75 area in the last hour, stalling the overnight bounce from sub-161.00 levels or a nearly two-week low.
Despite mixed PMI data from Japan, hopes that Japan will strike a trade deal with the US, along with expectations that the Bank of Japan (BoJ) will continue raising interest rates, underpin the Japanese Yen (JPY) and cap the EUR/JPY cross. In fact, reports indicated that the BoJ is planning to signal next week that there is almost no need to change its basic stance on raising interest rates as the impact of increased US tariffs will not disrupt the ongoing cycle of wage growth and inflation.
This marks a big divergence in comparison to the European Central Bank’s (ECB) dovish decision last week, which along with a modest US Dollar (USD) uptick, is seen weighing on the shared currency and acting as a headwind for the EUR/JPY cross. The ECB lowered interest rates for the seventh time in a year last Thursday and warned that economic growth will take a big hit from US tariffs. This, in turn, bolstered the case for further policy easing by the ECB in the months ahead.
Meanwhile, the optimism fueled by easing US-China trade tensions remains supportive of the risk-on impulse. This might hold back traders from placing aggressive bullish bets around the safe-haven JPY and lend some support to the EUR/JPY cross. Even from a technical perspective, the range-bound price action witnessed over the past two weeks or so warrants some caution before positioning for a firm near-term direction. Traders now look to the flash Eurozone PMIs for a fresh impetus.
Tariffs FAQs
Tariffs are customs duties levied on certain merchandise imports or a category of products. Tariffs are designed to help local producers and manufacturers be more competitive in the market by providing a price advantage over similar goods that can be imported. Tariffs are widely used as tools of protectionism, along with trade barriers and import quotas.
Although tariffs and taxes both generate government revenue to fund public goods and services, they have several distinctions. Tariffs are prepaid at the port of entry, while taxes are paid at the time of purchase. Taxes are imposed on individual taxpayers and businesses, while tariffs are paid by importers.
There are two schools of thought among economists regarding the usage of tariffs. While some argue that tariffs are necessary to protect domestic industries and address trade imbalances, others see them as a harmful tool that could potentially drive prices higher over the long term and lead to a damaging trade war by encouraging tit-for-tat tariffs.
During the run-up to the presidential election in November 2024, Donald Trump made it clear that he intends to use tariffs to support the US economy and American producers. In 2024, Mexico, China and Canada accounted for 42% of total US imports. In this period, Mexico stood out as the top exporter with $466.6 billion, according to the US Census Bureau. Hence, Trump wants to focus on these three nations when imposing tariffs. He also plans to use the revenue generated through tariffs to lower personal income taxes.
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