EUR/JPY holds losses near 161.00 due to heightened global risk aversion

EUR/JPY faces challenges due to risk-off mood following US President-elect Donald Trump's announcement of import tariffs.
The Japanese Yen may struggle due to uncertainty surrounding the BoJ’s future rate hikes.
The ECB is widely anticipated to implement a 25 basis point rate cut in December.

EUR/JPY remains in negative territory despite trimming intraday losses, trading near 161.20 during European hours on Tuesday. The EUR/JPY cross faces headwinds as the safe-haven Japanese Yen (JPY) holds firm, bolstered by heightened global risk aversion following US President-elect Donald Trump's renewed tariff threats on China, Mexico, and Canada.

These developments have dampened market sentiment, adding downward pressure on European economies and weighing on the risk-sensitive Euro. As a result, the EUR/JPY cross struggles to gain traction amid a challenging external environment.

However, the Japanese Yen (JPY) may struggle due to uncertainty surrounding the Bank of Japan's (BoJ) future rate hikes. BoJ Governor Kazuo Ueda has hinted at the possibility of another interest rate hike as early as December. Traders are focused on upcoming Tokyo Consumer Price Index data for November, which is seen as a leading indicator of nationwide price trends.

In the Eurozone, markets have fully priced in a 25-basis-point (bps) rate cut by the European Central Bank (ECB) in December, with the probability of a larger 50 bps cut rising to 58%. This underscores growing market pessimism about the region's economic outlook.

Such expectations weigh heavily on the Euro, further limiting the upside potential of the EUR/JPY cross, as concerns about monetary easing and economic weakness continue to dominate market sentiment.

The downside risks persist for the EUR/JPY cross as the Euro also faces pressure from growing concerns about the Eurozone's economic outlook. These concerns are fueled by uncertainties surrounding political instability in Germany and France.

Central banks FAQs

What does a central bank do?

Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.

What does a central bank do when inflation undershoots or overshoots its projected target?

A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.

Who decides on monetary policy and interest rates?

A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.

Is there a president or head of a central bank?

Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.

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