I would take the tile all the way up to the ceiling (and down to the floor, too). Have you considered raising the upper cabinet to the ceiling? If you did that —and added a shelf below it for frequently used items— you’d not only increase your storage space but you’d eliminate the issue of having to tile the awkward space above the cabinet! You could also add more lighting to the space via undercabinet lighting, and, perhaps, wall sconces. It looks awfully dark in there and laundry, like cooking, really benefits from good task lighting. Will you be removing the existing partial-height backsplash?

Those are good ideas, but if I raise the cabinets, it will leave holes from where the rod is connected. I don’t want to raise the rod up 12” because it would then be too high. I’m only 5’2” :).

Agreed. Tile the whole wall. Bigger tile same style. I’d love the penny one for the floor. Great space.

but if I raise the cabinets, it will leave holes from where the rod is connected.

If you did raise the cabinet, you could install that upper shelf you mentioned and that would cover the hole left by the rod. 😑

But if OP raises the cabinet, will they be able to reach the items in there? I'm average height, and I wouldn't be able to. I would tile the entire wall and up above the top of the cabinet. Or, some type of stackable cabinet "add on" on top of the existing cabinets (I don't know the technical term) or some type of woodworked solution to visually connect the cabinet to the ceiling.

Grout is a total PITA to clean. I’d ask yourself if you really want so much maintained before installing so much small tile. (I’m also biased because I love wallpaper and avoid tile like the plague). Regardless, I’d go for a larger format tile and one without grey in it. Your cabinets and countertops are very warm. The grey in the wallpaper is so minimal it pretty much reads beige, but I don’t think the same will happen with those tiles. I’d stick to white unless it’s a very very warm grey in the tile.

Are you removing the back splash you already have? Then tiling would look better. I personally think the tiles you picked are too small and cool in color for that counter. You need a warner white or cream. Or marble look with a creamy background and hold veining. You could build a box above the cabinet to connect to ceiling. Use the space to store overflow lighter items, etc. stuff you access infrequently such that bringing out a step stool is not a big deal

Why would you have to clean grout on a laundry room wall? If it's not getting wet or having stuff splashed on it, all that's required is a quick dusting and perhaps an occasional wipe-down with a damp sponge.