- EUR/JPY may appreciate further amid improving global risk sentiment after Trump’s announcement of milder tariffs on Chinese imports.
- German Chancellor-in-waiting Friedrich Merz warned, “President Trump’s policies are increasing the likelihood of a financial crisis sooner than expected.”
- Gains in the currency cross pair may be capped as the Japanese Yen continues to benefit from safe-haven demand.
EUR/JPY experiences volatility during European hours on Monday, trading near the 163.00 mark. The Euro finds support as improved global risk sentiment boosts demand for risk-sensitive assets. This optimism followed US President Donald Trump’s announcement late Sunday of less severe tariffs on Chinese imports, including semiconductors and electronics.
However, Trump clarified that previously speculated exemptions would not be granted. The affected goods will still face the existing 20% tariffs related to fentanyl rather than the much steeper 145% duties that had been suggested earlier.
Meanwhile, German Chancellor-in-waiting Friedrich Merz expressed concern over Trump’s economic strategy in an interview with Handelsblatt on Saturday. “President Trump’s policies are increasing the risk that the next financial crisis will hit sooner than expected,” he warned. Merz also advocated for a new transatlantic trade pact, proposing “Zero percent tariffs on everything—that would be better for both sides.”
Despite the Euro’s gains, the upside for EUR/JPY cross may be limited. The Japanese Yen continues to draw support from safe-haven flows amid lingering concerns over the US-China trade tensions. Additionally, optimism around a potential US-Japan trade deal, alongside expectations that the Bank of Japan (BoJ) may continue tightening policy in 2025 due to broadening inflationary pressures, further underpins the Yen.
Japanese Prime Minister Shigeru Ishiba echoed these concerns on Monday, warning that US tariff actions could destabilize the global economic order. Addressing parliament, Ishiba stated, “I am fully aware that what has happened so far has the potential to disrupt the global economic order,” while reaffirming Japan’s commitment to cooperating with Washington on trade and security.
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.
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