EUR/JPY hovers around 172.50 as US-Japan tariff deal improves market sentiment

• EUR/JPY holds ground amid improving market sentiment in Japan, following the US-Japan tariff deal.
• The Reuters Tankan index for manufacturers rose to 13 in September, its highest since August 2022.
• The European Central Bank is expected to keep rates unchanged for the second consecutive meeting on Thursday.

EUR/JPY holds ground after registering almost 1% losses in the previous two sessions, trading around 172.60 during the Asian hours on Wednesday. The currency cross moves little as the Japanese Yen (JPY) maintains its position after the Reuters Tankan index for manufacturers climbed to 13 in September, its highest since August 2022.

The market sentiment improved in Japan, following easing trade uncertainties following a tariff deal with the US, which lifted sentiment in six of nine manufacturing industries. Japan's trade negotiator Ryosei Akazawa said on Tuesday that US tariffs on Japanese goods, including cars and auto parts, will be reduced by September 16.

The EUR/JPY cross may receive some support as the Euro (EUR) could hold ground ahead of the policy decision by the European Central Bank (ECB) on Thursday. The ECB is widely expected to keep rates unchanged for the second consecutive meeting on Thursday, supported by steady growth and inflation hovering near the target. Traders will likely observe the meeting for any guidance on the central bank's outlook for the rest of the year.

The French parliament voted on a vote of no confidence on Prime Minister François Bayrou as parties could not agree to budget cuts, forcing President Emmanuel Macron to appoint the country's fifth PM in less than two years.

The geopolitical situation is eyed as Poland placed its air defenses on high alert, following a warning from Ukraine's Air Force. Ukraine warned of a suspected Russian drone incursion into Polish airspace, breaching the North Atlantic Treaty Organization (NATO) airspace.