EUR/JPY has dropped to around 161.00 after Donald Trump announced plans for 50% tariffs on EU imports. This is the lowest level for the currency pair in a month, driven by decreased demand for the Euro amid trade tensions between the US and the EU. The European Central Bank (ECB) is expected to lower interest rates in June, which could further weaken the Euro. In contrast, Japan’s recent inflation data shows a National CPI increase to 3.6%, boosting the Yen’s strength and allowing it to outperform most major currencies, especially against the US Dollar.

Impact of US Tariffs on EU

The potential for increased US tariffs on the EU significantly impacts the Euro. In 2024, EU exports to the US doubled compared to imports, creating a trade imbalance that adds pressure during these tense relations. The Japanese Yen has become more attractive, with speculation that the Bank of Japan may raise rates in July due to inflation figures exceeding expectations. This suggests a shift toward tighter monetary policy. The recent drop in EUR/JPY signifies a shift in momentum, primarily due to reduced demand for the Euro. This isn’t just seasonal; it’s a direct response to trade pressures. The idea of imposing a 50% tariff on EU goods unsettles the export-driven sectors in Europe. Trump’s proposal suggests long-term weakness for the Euro, not only because of retaliation fears but also due to the structural trade imbalance, which makes the EU more vulnerable. Their exports to the US are double what they import, creating a precarious situation when tariffs come into play.

European Central Bank and Japanese Monetary Policy

Additionally, the ECB is facing the possibility of monetary easing, which raises further risks for the Euro. A rate cut in June seems likely, supported by market expectations that soft inflation and mixed data will prompt action. This only adds to the downward pressure on the Euro. On the other hand, the Yen is in a strong position. Japan’s core CPI is above 3.5%, lending credibility to the idea that the Bank of Japan might tighten its policy soon. The new leadership has less reason to delay, especially given recent inflation surprises. Markets are now factoring in a rate hike in July, which was previously thought impossible for Japan. From a speculative viewpoint, implied volatility for EUR/JPY is rising, and spreads for Yen protection are widening, indicating increased demand for safer investments. Current conditions seem to favor further declines rather than recoveries, focusing attention on levels below 161.00 as a checkpoint. Options activity shows a preference for hedging rather than reversal trades, meaning that participants are preparing for continued movement instead of quick rebounds. In recent months, we’ve learned that monetary divergence is not just a theory; it’s happening now amid heightened trade tensions. What once seemed speculative, like BoJ tightening, is becoming more likely, while ECB easing is coming into clearer focus. Strategically, currency pairs linked to interest rate shifts are reacting sharply to small changes in data, indicating low tolerance for uncertainty. This calls for a more agile approach to risk management as conditions change quickly. If speculation over tariffs continues, we can expect further Euro selling across USD- and JPY-linked pairs. For now, we will focus on short gamma hedges, particularly for near-dated expiries, as the demand for exposure to downside risks grows. Tight bid-offer spreads in Yen call options suggest positioning is shifting toward a quieter short stance. If the Euro gets sold off further, sterling crosses might become the next liquidity alternative. We must treat directional movements as event-driven and refrain from applying past frameworks focused on range-bound trading. Cross-currency shifts are about more than just central bank differences; they now involve potential trade disruptions, adding velocity to market movements that might have otherwise faded. Markets react poorly to unpredictable policy discussions, especially with the current imbalanced EU-US trade flow. Continued rhetoric will likely keep the Euro skewed downward against many key pairs, and we should prepare for this scenario. Create your live VT Markets account and start trading now.

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