EUR/JPY holds gains near 162.50, downside seems possible due to ECB's dovish signals

• EUR/JPY is climbing as the Japanese Yen weakens amid fading demand for safe-haven assets.
• Contributing to the risk-on sentiment, President Trump has expressed a willingness to ease tariffs on Chinese goods.
• ECB policymaker Olli Rehn suggested that further interest rate cuts may be necessary to support the Eurozone economy.

EUR/JPY gains ground after registering more than 0.50% losses in the previous session, trading around 162.40 during European hours on Tuesday. The currency cross is gaining ground as the Japanese Yen (JPY) weakens, driven by a decline in demand for traditional safe-haven assets amid renewed optimism over US-China trade relations.

US President Donald Trump has expressed a willingness to ease tariffs on Chinese goods, while Beijing has granted exemptions for certain US imports previously subject to steep levies. These developments have boosted hopes for a resolution to the prolonged trade conflict between the two economic giants.

Meanwhile, the Bank of Japan (BoJ) is scheduled to announce its policy decision on Thursday, with markets widely expecting interest rates to remain unchanged due to ongoing concerns about Japan's fragile economy.

However, signs of rising inflation may keep the door open for potential tightening in the future. A swift trade agreement between the US and Japan could further increase the BoJ's confidence to consider rate hikes, diverging sharply from the growing expectation that the Federal Reserve may lean toward deeper rate cuts in response to slowing global growth.

On the other front, the upside for the EUR/JPY cross may be capped as the Euro (EUR) weakens following dovish signals from the European Central Bank (ECB). ECB policymaker Olli Rehn stated on Monday that the central bank may need to lower interest rates below the neutral level to support the economy.

Earlier this month, the ECB cut rates for the seventh time this year, citing concerns that US tariffs could weigh heavily on economic growth. Following the decision, traders are now pricing in a roughly 75% chance of another rate cut in June, up from about 60% prior, according to data from LSEG.