EUR/JPY stays around 156.50, downside risks appear due to risk-off mood, hawkish BoJ

• EUR/JPY maintains its position amid rising odds of the BoJ rate hikes.
• Risk aversion increases due to rising trade tensions and economic uncertainty following US tariffs on steel and aluminum imports.
• The Euro struggles as the likelihood of deeper ECB rate cuts increases.

EUR/JPY remains steady after gaining ground in the previous session, trading around 156.60 during the Asian hours on Tuesday. The downside risks for the EUR/JPY cross seem possible as the Japanese Yen (JPY) gains ground against its peers, fueled by growing expectations that the Bank of Japan (BoJ) will continue raising rates this year.

The Bank of Japan Governor Kazuo Ueda and Deputy Governor Himino recently indicated the potential for another interest rate hike if economic conditions and inflation align with the central bank's projections. Last week, BoJ board member Naoki Tamura emphasized the need to raise the policy rate to at least 1% in the latter half of fiscal 2025. Moreover, stronger-than-expected wage and household spending data have reinforced the hawkish stance on monetary policy.

Furthermore, heightened risk aversion may strengthen the safe-haven JPY while weighing on the risk-sensitive Euro, exerting downward pressure on the EUR/JPY pair. US President Donald Trump imposed a flat 25% tariff on steel and aluminum imports on Monday, removing all exemptions and nullifying previous trade agreements with key United States (US) allies. The move is intended to support struggling domestic industries but increases the risk of a broader trade conflict.

German Chancellor Olaf Scholz stated earlier that the European Union (EU) could react "within an hour" if the US imposes the proposed tariffs on European goods. Separately, Bernd Lange, head of the European Parliament's trade committee, suggested that to avoid a trade war, the EU is open to reducing its 10% import tax on vehicles to a rate closer to the 2.5% tariff imposed by the US.

The Euro faces challenges amid rising concerns over potential deflationary pressures in the Eurozone due to expected US tariffs have intensified odds of deeper ECB rate cuts, with markets now predicting the deposit rate could fall to 1.87% by December.