EUR/JPY trades below 161.50 after pulling back from four-week highs

EUR/JPY retreats after hitting a four-week-high of 162.47 on Tuesday.
The German IFO Business Climate came in at 84.7 in December, down from November’s 85.6 reading.
The JPY may struggle due to increased chances of the BoJ holding off on a rate hike on Thursday.

Akhtar Faruqui FXStreet

EUR/JPY halts its two days of gains, pulling back from a four-week high of 162.47, which was marked on Tuesday. The downside of the EUR/JPY cross is bolstered by the release of mixed German data from the CESifo Group, trading around 161.30 during the European hours.

The headline German IFO Business Climate Index declined to 84.7 in December, from the previous reading of 85.6. Meanwhile, the Current Economic Assessment Index improved to 85.1 from 84.3 in November, surpassing the estimated 84.0. However, the Expectations Index, reflecting firms' outlook for the next six months, dropped sharply to 84.4 in December compared to 87.0 in November.

The Euro faces challenges following the dovish remarks from ECB President Christine Lagarde on Monday. Lagarde spoke at the Annual Economics Conference, indicating that the ECB is prepared to cut rates further if incoming data confirm that disinflation remains on track. Lagarde also signaled a shift in policy stance, noting that the previous bias toward maintaining "sufficiently restrictive" rates is no longer warranted.

Moreover, data showed on Monday that Eurozone PMI figures exceeded expectations in December; however, Services PMI surveys remain in contraction territory amid growing concerns about a deepening economic slowdown in Europe, which continues to weigh on investor and business sentiment.

However, the downside of the EUR/JPY cross would be limited as the Japanese Yen (JPY) may depreciate due to the rising likelihood that the Bank of Japan (BoJ) may avoid an interest rate hike on Thursday.

The markets are currently pricing in less than a 30% chance of a BoJ’s rate hike in December. Several Bank of Japan (BoJ) policymakers seem in no hurry to tighten monetary policy further, given the minimal risk of inflation overshooting despite Japan's persistently near-zero borrowing costs.

Reports suggested the central bank sees "little cost" in delaying further tightening, preferring to wait for more evidence of wage growth before implementing additional policy adjustments. Japan's economy minister, Ryosei Akazawa, reaffirmed that the Bank of Japan and the government will collaborate on appropriate monetary policies.

Economic Indicator

IFO – Business Climate

This German business sentiment index released by the CESifo Group is closely watched as an early indicator of current conditions and business expectations in Germany. The Institute surveys more than 7,000 enterprises on their assessment of the business situation and their short-term planning. The positive economic growth anticipates bullish movements for the EUR, while a low reading is seen as negative (or bearish).

GBP/USD extends the drop to 1.3360

GBP/USD builds on Monday’s decline and briefly clinches five-day lows near 1.3360 on Tuesday. Cable’s extra pullback follows the better tone in the Greenback as uncertainty in the Middle East prompts investors to adopt a cautious stance. Meanwhile, an apathetic UK labour market report also collaborates with the selling pressure on the British Pound.

EUR/USD stays offered just above 1.1400

EUR/USD keeps the downtrend well in place for yet another day, challenging the 1.1400 contention zone on Tuesday. The continuation of the selling impulse in spot comes amid decent gains in the US Dollar, which continues to find support in the persistent effervescence surrounding the US-Iran crisis.

Middle East crisis intensifies, Gold up

Gold now seems to have embarked on a consolidative phase below the key $4,100 mark per troy ounce in the latter part of Tuesday’s session. Meanwhile, uncertainty surrounding the Middle East conflict and rising expectations for a hawkish Fed policy outlook are expected to limit the precious metal’s bullish momentum in the near term.

XRP extends recovery as on-chain activity grows

Ripple (XRP) ticks up and trades around $1.13 at the time of writing on Tuesday. This rebound aligns with a broader recovery in the cryptocurrency market, attributed to reports that mediators between the United States (US) and Iran are seeking a 10-day cessation of strikes to find a way back to the signed Memorandum of Understanding (MoU).

The Iranian war has again risen

The Iranian war has again risen to the top of the economics factor list. There is no end in sight. Intelligence experts say the current level of offense/retaliation will not change minds in Tehran, while in Washington, Trump fears all-out war, which would mean boots on the ground.

US Dollar mid-year outlook: Exceptional currency, exceptional risks?

The US Dollar enters the second half of 2026 in a markedly different position from a year ago. The King currency has recovered, reflecting persistent US inflation, changing expectations for Fed policy, geopolitical tensions and renewed demand for defensive assets.