• EUR/JPY rises as the Euro gains support from real money flows, with investors hedging Dollar exposure or repatriating US assets.
  • The European Central Bank is expected to implement a 25-basis-point rate cut on Thursday.
  • The Japanese Yen benefits from safe-haven demand amid growing concerns over the economic impact of potential new US tariffs.

EUR/JPY rebounds after two consecutive sessions of losses, trading near 162.00 during Wednesday’s European hours. The currency cross strengthens as the Euro (EUR) gains traction against its peers, supported by real money flows as investors hedge Dollar exposure or repatriate US assets.

ING FX analysts Francesco Pesole and Chris Turner remarked that “We are not major subscribers to the dollar having permanently lost its safe haven status, but acknowledge that lower US growth rates are coming and that Federal Reserve easing in the second half will hit the dollar broadly."

However, further gains in EUR/JPY cross may be constrained as expectations of a European Central Bank (ECB) rate cut limit the Euro’s upside. Markets anticipate a 25-basis-point reduction on Thursday, which would lower the Deposit Facility Rate from 2.5% to 2.25%, following two previous cuts this year.

Investors will closely monitor ECB President Christine Lagarde’s press conference for insights into the central bank’s policy trajectory and the potential repercussions of US tariff actions on the Eurozone economy.

Meanwhile, safe-haven demand boosts the Japanese Yen (JPY) as concerns grow over the economic fallout from potential new US tariffs. In the latest trade policy development, President Donald Trump has ordered an investigation into imposing tariffs on all US critical mineral imports, many of which originate from China.

Bank of Japan (BoJ) Governor Kazuo Ueda, in an interview with the Sankei newspaper, acknowledged the growing risks associated with US trade measures, stating that a policy response may be necessary. Ueda noted that the evolving situation is increasingly aligning with the central bank’s anticipated negative scenario, already affecting business and household sentiment.

Risk sentiment FAQs

In the world of financial jargon the two widely used terms “risk-on” and “risk off'' refer to the level of risk that investors are willing to stomach during the period referenced. In a “risk-on” market, investors are optimistic about the future and more willing to buy risky assets. In a “risk-off” market investors start to ‘play it safe’ because they are worried about the future, and therefore buy less risky assets that are more certain of bringing a return, even if it is relatively modest.

Typically, during periods of “risk-on”, stock markets will rise, most commodities – except Gold – will also gain in value, since they benefit from a positive growth outlook. The currencies of nations that are heavy commodity exporters strengthen because of increased demand, and Cryptocurrencies rise. In a “risk-off” market, Bonds go up – especially major government Bonds – Gold shines, and safe-haven currencies such as the Japanese Yen, Swiss Franc and US Dollar all benefit.

The Australian Dollar (AUD), the Canadian Dollar (CAD), the New Zealand Dollar (NZD) and minor FX like the Ruble (RUB) and the South African Rand (ZAR), all tend to rise in markets that are “risk-on”. This is because the economies of these currencies are heavily reliant on commodity exports for growth, and commodities tend to rise in price during risk-on periods. This is because investors foresee greater demand for raw materials in the future due to heightened economic activity.

The major currencies that tend to rise during periods of “risk-off” are the US Dollar (USD), the Japanese Yen (JPY) and the Swiss Franc (CHF). The US Dollar, because it is the world’s reserve currency, and because in times of crisis investors buy US government debt, which is seen as safe because the largest economy in the world is unlikely to default. The Yen, from increased demand for Japanese government bonds, because a high proportion are held by domestic investors who are unlikely to dump them – even in a crisis. The Swiss Franc, because strict Swiss banking laws offer investors enhanced capital protection.

Source: Fxstreet