EUR/JPY pressured by safe-haven flows into Yen amid Middle East war

• EUR/JPY remains under pressure around 183.00, down about 0.10% on the day.
• Germany and Eurozone PMI data show improving activity in February.
• War in the Middle East boosts demand for the JPY as a safe-haven asset.

EUR/JPY trades around 183.00 on Tuesday at the time of writing, down 0.10% on the day, as the Japanese Yen (JPY) benefits from renewed safe-haven demand amid rising geopolitical tensions in the Middle East.

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. Meanwhile, the German Composite PMI edged higher to 53.2 from the previous 53.1.

Across the Eurozone, the Composite PMI climbed to 51.9 in February from 51.3 in January, marking a three-month high. The Services PMI also improved to 51.9 from 51.6 previously, indicating a faster pace of output growth compared with the start of the year.

Inflation data, released on Tuesday,  also delivered mixed signals for the monetary policy outlook. According to a flash estimate from Eurostat, the Eurozone Harmonized Index of Consumer Prices (HICP) rose 1.9% YoY in February, compared with 1.7% in January. Core inflation, which excludes volatile components such as food, energy, alcohol and tobacco, increased to 2.4% YoY, above both the market consensus and the previous reading of 2.2%.

Despite these relatively supportive economic indicators for the Euro (EUR), the Japanese Yen is currently benefiting from increased risk aversion. Tensions between the United States (US), Israel and Iran have intensified after US President Donald Trump stated that most of Iran’s military installations had been “knocked out” and that new strikes targeted Iranian leadership, according to CNBC. The escalation is supporting demand for safe-haven assets, including the JPY.

The Japanese currency is also receiving support from comments by policymakers. Bank of Japan (BoJ) Deputy Governor Ryozo Himino said on Monday 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.

However, the upside potential for the Japanese Yen may remain limited. According to Reuters, 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. This caution comes alongside reservations expressed by Japanese Prime Minister Sanae Takaichi regarding further monetary tightening, which could limit Japanese Yen gains and prevent a deeper decline in EUR/JPY.

Analysts at MUFG also noted that the JPY currently stands between two opposing forces: support from rising risk aversion and uncertainty surrounding Japan’s monetary policy outlook. According to the analysts, stronger safe-haven flows could support further JPY appreciation, while the persistence of the Middle East war could reduce the likelihood of a near-term rate hike by the Bank of Japan.