- EUR/JPY strengthens as the Japanese Yen depreciates due to increased market optimism following postponement of Trump's reciprocal tariffs.
- The JPY could find support due to the rising hawkish tone surrounding the Bank of Japan’s policy outlook.
- The Euro could face challenges as ECB officials remain confident in the outlook for three more rate cuts this year.
EUR/JPY retraces its recent losses, trading around 159.10 during the Asian hours on Tuesday. The EUR/JPY cross appreciates as the Japanese Yen (JPY) loses ground amid increased market optimism due to the postponement of the implementation of US President Donald Trump's reciprocal tariffs.
However, the upside of the EUR/JPY cross could be limited as the Japanese Yen may regain its ground amid increased hawkish sentiment surrounding the Bank of Japan’s (BoE) policy outlook, driven by a robust Japan’s Gross Domestic Product (GDP) report that exceeded expectations.
Markets are now pricing-in an additional 37 basis points rate increase by the Bank of Japan in 2025, driving the yield on the benchmark 10-year Japanese government bond to its highest level since April 2010.
The Euro could face downward pressure as several European Central Bank (ECB) officials remain comfortable with the outlook for three more rate cuts this year, following a 25 basis point reduction to 2.75% last month.
However, the Euro could gain support if a ceasefire in Ukraine is reached and gas supplies resume. A JP Morgan note suggests that the EUR/USD pair could appreciate by up to 5% under such circumstances.
Reports indicate that US President Donald Trump and Russian President Vladimir Putin have agreed to initiate negotiations to end the conflict. Officials from the Trump administration are scheduled to meet with their Russian counterparts in Saudi Arabia on Tuesday to discuss a potential peace agreement.
Interest rates FAQs
Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%. If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.
Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.
Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank. If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.
The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure. Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.
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