EUR/JPY gains as Oil price surge, BoJ rate hike delay weigh on Yen

• EUR/JPY trades around 183.20 on Monday, gaining 0.35% as the Japanese Yen weakens.
• Escalating tensions between the US, Israel and Iran increase geopolitical uncertainty.
• Expectations that the Bank of Japan could delay rate hikes limit the upside for the JPY.

EUR/JPY trades around 183.20 on Monday, up 0.35% on the day at the time of writing, as the Japanese Yen (JPY) weakens against the Euro (EUR). The cross remains supported despite elevated geopolitical tensions in the Middle East, which would normally favor safe-haven currencies such as the Japanese Yen.

The conflict involving the United States (US), Israel and Iran has now entered its tenth day. Iran has appointed Mojtaba Khamenei, the second son of the late Ayatollah Ali Khamenei, as the country’s new Supreme Leader after his father was killed in the initial wave of US-Israeli strikes. US President Donald Trump has demanded Iran’s “unconditional surrender” and indicated that Washington expects to play a role in selecting a leader considered acceptable by the White House.

The escalation in regional tensions increases geopolitical risks and could support demand for safe-haven assets such as the Japanese Yen. However, the positive impact on the currency remains limited for now.

Uncertainty surrounding the interest rate path of the Bank of Japan (BoJ) is weighing on the Japanese currency. Last week, BoJ Governor Kazuo Ueda signaled that the central bank could keep interest rates unchanged for longer than previously expected due to the potential economic impact of the Middle East war and higher Oil prices. While some analysts had previously expected a rate hike in March, many economists now anticipate that the Bank of Japan will wait until at least June or July before tightening policy, according to Reuters.

In the Eurozone, investor sentiment has deteriorated. The Sentix Investor Confidence Index fell to -3.1 in March from 4.2 in February, reflecting growing concerns about the impact of the Iran conflict on global energy markets. Attacks on energy infrastructure and disruptions to shipping in the Persian Gulf have pushed Oil prices higher and increased economic uncertainty.

Recent economic data from Germany also highlight the fragile state of the industrial sector. Germany’s Industrial Production declined by 0.5% MoM in January, while Factory Orders plunged 11.1% after a 6.4% rise in the previous month. According to Commerzbank, German industry appears to be stabilizing but shows no clear signs of recovery yet, suggesting that the sector is unlikely to provide strong support to first-quarter Gross Domestic Product (GDP) growth.

Meanwhile, Rabobank strategists note that the Euro remains vulnerable in the current environment. The single currency lacks safe-haven status and is exposed to energy shocks due to the Eurozone’s position as a net energy importer. Despite these risks, markets are currently pricing in two interest rate hikes by the European Central Bank (ECB) over a one-year horizon, driven by concerns over inflation linked to rising energy prices.

Looking ahead, investors will also focus on upcoming Japanese economic data, particularly the revised estimate of fourth-quarter GDP, scheduled for release on Tuesday.