BoJ rate hike, safe-haven flows to boost Yen

The EURJPY cross trades in positive territory around 162.55 during the early European session on Tuesday. However, the potential upside of the cross might be limited amid concerns about US President Donald Trump’s trade tariffs and rising speculation about a further Bank of Japan rate hike.

The BoJ raised interest rates on Friday by a quarter point to 0.5%, their highest since 2008, as widely expected. BoJ Governor Kazuo Ueda said the central bank will continue hiking if the outlook is realised, adding that there is scope to push up borrowing costs further before they reach levels deemed neutral to the economy.

This, in turn, could provide some support to the Japanese Yen against the shared currency. Markets were pricing in one more 25 basis points (bps) rate hike by the end of this year.

Meanwhile, the uncertainties with proposed Trump tariffs could trigger the fear of trade wars and elevate market volatility. This might lift a safe-haven currency like the JPY and create a headwind for EURJPY.

On the Euro front, rising expectations for further rate cuts by the European Central Bank on Thursday might undermine the Euro.

The ECB is expected to cut its benchmark deposit rate by a further quarter point to 2.75% at its January meeting, its fourth reduction in a row.

Analysts at Citi anticipate the ECB to reduce interest rates by a quarter of a percentage point at every meeting until at least the summer, citing weak growth and cooling inflation in the Eurozone.

(Source: OANDA)