EUR/JPY relinquished a significant portion of its Asian session gains, although further downside appears constrained. Expectations of a US-Japan trade agreement and speculation regarding future Bank of Japan (BoJ) rate increases are providing support for the JPY, thereby limiting the EUR/JPY pair’s upward movement. Prevailing risk-on sentiment is acting as a headwind for the safe-haven JPY, potentially offering support to spot prices. The EUR/JPY cross encountered resistance near the 162.50 level, attracting intraday selling pressure. The pair retreated to the lower end of its daily range, around 161.80-161.75, halting the overnight recovery from sub-161.00 levels. Despite mixed PMI data from Japan, optimism surrounding a potential US-Japan trade accord, coupled with anticipations of continued BoJ rate hikes, are bolstering the JPY and capping the EUR/JPY cross. Recent reports suggest the BoJ intends to signal next week that adjustments to its basic stance on interest rate increases are unlikely, as the impact of increased US tariffs is not expected to disrupt the current wage growth and inflation cycle. This contrasts sharply with the European Central Bank’s (ECB) recent dovish policy decision, which, alongside a modest USD appreciation, is weighing on the Euro and acting as a headwind for the EUR/JPY cross. The ECB lowered interest rates last Thursday and cautioned that economic growth will be significantly impacted by US tariffs, reinforcing the likelihood of further policy easing by the ECB in the coming months.
