The Euro is easing against the Japanese Yen amid renewed concerns regarding EU-US trade discussions and post-election clarity in Japan. EUR/JPY is holding above the 172.00 support level as bullish momentum fades.
Japan’s election results temporarily boosted the Yen. Although Prime Minister Ishiba’s coalition lost its upper-house majority, his government is likely to remain in power and advance with American trade negotiations.
Post Election Clarity
The clarity post-election has been welcomed, averting a potential low-tax opposition agenda. Japan remains eager to resolve trade tensions with the US and avoid a 25% reciprocal tariff targeting most of its exports.
The European Union faces mounting trade risks, with planned US tariffs on EU imports expected to impact particularly export-driven economies like Germany. The European Central Bank’s business survey indicates pressure on Eurozone profit margins, reinforcing expectations of cautious upcoming ECB decisions.
EUR/JPY faced a pullback from multi-year highs of 173.25, consolidating above the 172.00 support zone. Momentum is easing, indicated by the RSI exiting overbought territory, with further price action hinging on key levels such as the 20-day SMA.
Tariffs, levied on imports, aim to protect local producers but can raise prices and cause trade wars. Donald Trump’s plan includes tariffs on imports from Mexico, China, and Canada to support US producers.
Trade Tensions And Market Reactions
Given the fading bullish momentum in EUR/JPY, we believe derivative traders should exercise caution on long positions. The pair’s struggle to hold above the recent multi-year highs suggests upward potential is limited for now. The key is to watch whether the 172.00 support level holds against mounting geopolitical and economic pressures.
European trade risks are a primary concern, especially as recent data shows German factory orders fell unexpectedly, reinforcing the view of a struggling export-led economy. The European Central Bank’s business survey already indicated pressure on profit margins, which makes a cautious, or dovish, policy stance more likely. This leads us to anticipate continued headwinds for the single currency.
On the other hand, the clarity following the Japanese election provides a more stable backdrop for its currency. We note that Prime Minister Ishiba’s government will be intensely focused on trade negotiations, as the United States remains its top export destination, accounting for over $14 billion in exports in a recent month alone. This urgency to avoid reciprocal tariffs could lend relative strength to the Yen.
The tariff plans outlined by the former U.S. president introduce significant uncertainty, which historically benefits safe-haven assets. We recall the market volatility during the 2018-2019 trade disputes, which often led to a flight-to-safety that benefited currencies like the Yen over the Euro. Should similar policies be enacted, we expect the Euro to be more vulnerable due to the EU’s larger direct trade surplus with the US.
We see an opportunity in buying EUR/JPY put options to position for a potential decline, especially if the price breaks below the 172.00 support zone. This strategy offers a defined risk while providing exposure to downside moves driven by the increasing trade anxieties. It is a more defensive posture than outright shorting the pair, which is prudent as the RSI indicator exits overbought territory.
Moving forward, our focus will be on the 20-day SMA as a gauge of the short-term trend. Upcoming inflation data from the Eurozone and any official statements on EU-US trade talks will be critical catalysts for price action. A decisive break below the current support zone would confirm our bearish outlook for the pair.
