EUR/JPY falls to near 161.00 as global trade war weigh on market sentiment

• EUR/JPY declines as the Japanese Yen strengthens on increased safe-haven demand.
• The Bank of Japan is widely expected to raise interest rates in 2025, supported by sustained wage growth and inflation.
• The Euro faces pressure as market sentiment weakens following the EU retaliatory tariffs on the United States.

EUR/JPY declines after two consecutive sessions of gains, trading around 161.10 during Asian hours on Thursday. The weakness of the currency cross is driven by a stronger Japanese Yen (JPY), which is benefiting from increased safe-haven demand.

The JPY remains supported by expectations that the Bank of Japan (BoJ) will continue raising interest rates this year, given persistent wage growth and inflation. BoJ Governor Ueda highlighted that long-term interest rates naturally adjust based on market expectations for future short-term rates, emphasizing the importance of clear communication on policy decisions.

On Wednesday, Japanese firms agreed to substantial wage hikes for the third straight year, aiming to help workers manage inflation and address labor shortages. Higher wages are expected to boost consumer spending, drive inflation, and give the BoJ more room for rate hikes.

However, Japanese Finance Minister Shunichi Kato cautioned on Thursday that Japan has yet to permanently overcome deflation, noting that the country's economy is facing a supply shortage rather than weak demand.

Additionally, the EUR/JPY cross faces pressure as the Euro (EUR) struggles amid dampened market sentiment following the European Union's (EU) retaliatory tariffs on the United States (US). The US imposed a 25% tariff on European steel and aluminum, prompting the EU to respond with tariffs on €26 billion worth of US goods in April.

Traders remain cautious as Germany's plans for a significant increase in state borrowing encounter new hurdles. On Wednesday, a co-leader of the Greens party remained non-committal about reaching a deal, while the far-left party filed another legal challenge.

Meanwhile, election winner Friedrich Merz is pushing to pass debt reforms and establish a €500 billion ($545 billion) infrastructure fund before the outgoing parliament dissolves. The success of these plans depends on support from the Greens and could also face potential roadblocks from court rulings, according to Reuters.