EUR/JPY traded around 183.00 on Tuesday, down 0.10% on the day, as the Japanese Yen (JPY) benefited from renewed safe-haven demand amid rising geopolitical tensions in the Middle East [1]. The escalation of tensions between the United States, Israel, and Iran, highlighted by US President Donald Trump's statement that most of Iran’s military installations had been 'knocked out' and new strikes targeted Iranian leadership, has increased risk aversion and supported demand for safe-haven assets such as the JPY [1].
On the European macroeconomic front, data released earlier in the day pointed to improving economic activity. The Germany HCOB Services Purchasing Managers Index (PMI) rose to 53.5 in February, slightly above market expectations of 53.4 and up from 52.4 in January. The German Composite PMI edged higher to 53.2 from 53.1 previously. Across the Eurozone, the Composite PMI climbed to 51.9 in February from 51.3 in January, marking a three-month high, while the Services PMI improved to 51.9 from 51.6, indicating a faster pace of output growth compared with the start of the year [1].
Inflation data delivered mixed signals for the monetary policy outlook. The Eurozone Harmonized Index of Consumer Prices (HICP) rose 1.9% year-on-year in February, compared with 1.7% in January. Core inflation increased to 2.4% year-on-year, above both the market consensus and the previous reading of 2.2% [1]. Despite these relatively supportive economic indicators for the Euro (EUR), the Japanese Yen is currently benefiting from increased risk aversion [1].
The Japanese currency is also receiving support from comments by policymakers. Bank of Japan (BoJ) Deputy Governor Ryozo Himino stated that the current policy stance remains 'somewhat accommodative', but added that the central bank should gradually raise interest rates if its economic and inflation projections are met [1]. However, sources familiar with the BoJ’s thinking indicated that recent market volatility triggered by the Middle East war has increased the likelihood that the BoJ could delay a potential rate hike at its March meeting. Japanese Prime Minister Sanae Takaichi also expressed reservations regarding further monetary tightening, which could limit Japanese Yen gains and prevent a deeper decline in EUR/JPY [1].
Analysts at MUFG noted that the JPY currently stands between two opposing forces: support from rising risk aversion and uncertainty surrounding Japan’s monetary policy outlook. Stronger safe-haven flows could support further JPY appreciation, while the persistence of the Middle East conflict and monetary policy caution may limit upside potential [1].
CONCLUSION
EUR/JPY is under pressure as geopolitical tensions in the Middle East drive safe-haven flows into the Japanese Yen, despite improving Eurozone economic data and inflation figures. Uncertainty around the Bank of Japan's monetary policy and potential rate hikes is tempering further Yen gains. The market remains sensitive to developments in both geopolitical risk and central bank policy outlook.