EUR/JPY retreats from YTD high amid trade tensions and overbought signals

• EUR/JPY tests a new YTD high of 172.28 as the safe-haven Yen remains under pressure.
• Europe remains optimistic about a potential trade deal with the US, but a lack of progress limits gains.
• EUR/JPY remains in overbought conditions after failing to test 173.00 resistance.

The Euro (EUR) is slipping against the Japanese Yen (JPY), easing from its recent year-to-date high of 172.28 reached on Wednesday amid fresh concerns over potential US tariffs targeting Japan.

After seven straight weeks of gains and a rally of more than 10% since March, the EUR/JPY pair finally hit resistance. Market participants had priced in optimism, but with trade tensions and central bank divergence back in focus, the pair has retreated below the 172.00 level.

Traders are now closely monitoring the ongoing negotiations between the US, the EU and Japan.

Tariff threats and trade tensions fuel uncertainty for Europe and Japan

On Monday, President Trump indicated that an official letter detailing new tariff measures would be released within two days, prompting speculation that the EU might receive it on Wednesday.

Adding to the urgency, German Chancellor Friedrich Merz addressed lawmakers on Wednesday, expressing hope for a swift trade deal with the US, one that ideally minimizes customs duties on both sides.

Meanwhile, the US is pressing ahead with plans to implement reciprocal tariffs starting in August. This has reignited concerns over the global cost implications, particularly for industries such as autos, steel and aluminium.

For policymakers, the stakes are rising.

Higher tariffs risk fuelling inflation, a concern particularly relevant in Japan, where consumer prices have already crept toward the Bank of Japan's target.

Both the EU and Japan are bracing for 25% tariffs on auto parts and a 50% levy on steel and aluminium shipped to the US. Japan, in particular, was warned of a blanket 25% tariff on all goods headed to the American market.

With the Bank of Japan holding its policy rate steady at 0.5%, the increased trade friction dims any near-term prospects for a rate hike. As uncertainty mounts, currency volatility is likely to remain elevated in the sessions ahead.

EUR/JPY retreats as the pair remains in overbought territory

EUR/JPY has begun to retreat, with price action stalling after bulls failed to test the psychological resistance level of 173.00. After peaking at 172.28, the pair is edging lower, with prices falling below 172.00 at the time of writing.

Technically, the pair remains in a strong uptrend; however, signs of exhaustion are beginning to emerge. The Relative Strength Index (RSI) remains in overbought territory above 73 and is pointing lower, hinting at potential short-term consolidation or a corrective pullback.

EUR/JPY daily chart

Support lies near the 78.6% Fibonacci retracement level of the July-August 2024 downtrend at 170.93, followed by the 20-day Simple Moving Average (SMA) at 168.89. A break below these levels could expose the 61.8% retracement at 167.40.

On the upside, a move above the 173.00 psychological level could bring the July 2024 high of 175.43 into play. But bulls may need a fundamental catalyst, such as a favorable trade deal, to push higher from here.

Overall, the technical setup suggests that while the broader bullish trend is intact, short-term momentum may be stretched, and a pause or correction is likely unless trade-related headlines provide further fuel.