The Euro is trading within a tight range against the Japanese Yen after peaking at 173.25, its highest point in a year. The Euro remains above the key support level of 172.00 due to differences in central bank policies and a weakening Japanese economy. Japan has released trade data indicating a decline in exports caused by tariffs. The adjusted trade balance showed a deficit of ¥-235.5 billion, while the overall balance was ¥153.1 billion, falling short of expectations. Year over year, Japan’s exports dropped by 0.5%, although imports grew slightly by 0.2%.

Market Analysis

The weak trade data from Japan puts pressure on the Yen because of low external demand and insufficient investment. Japan’s struggling economy and the Bank of Japan’s cautious stance contrast with the European Central Bank’s careful approach due to inflation, which supports the Euro. After hitting 173.25, sellers have pushed the EUR/JPY back toward 172.00. If the Euro rises above 173.00, it may continue toward 174.00. The 78.6% Fibonacci retracement level at 170.93 offers support, while dropping below the 50-day SMA could lead to more selling pressure. With central banks moving in different directions, we see the Euro likely to rise against the Yen. The interest rate difference is significant, with the European Central Bank’s rate at 3.75% compared to Japan’s near-zero rate. This difference makes the Euro more appealing.

Investment Strategy

We believe Japan’s weak economic data will continue to weigh on its currency. May’s core inflation was at 2.5%, slightly lower than expected, which leaves the central bank with little incentive to raise interest rates. In contrast, the Eurozone’s May inflation was 2.6%, supporting a careful approach to future rate cuts after recent adjustments. Historically, the current price is at levels we haven’t seen since 2008. The peak of 173.25 is a significant psychological barrier. If the Euro breaks above this level, it could move rapidly higher as few resistance points remain. Therefore, we should closely monitor this level. For derivative traders, buying call options with a strike price at or above 173.50 is a wise move to prepare for a potential breakout towards 174.00. This strategy allows us to take advantage of upward momentum while keeping our risk in check. The current tight trading range also offers chances for strategies that benefit from unexpected volatility increases. We will use the mentioned technical levels to manage our risk. If the price closes decisively below the 172.00 support level, we will consider reducing our bullish exposure. A further drop below the Fibonacci support at 170.93 would prompt us to exit long positions and think about buying protective puts. Create your live VT Markets account and start trading now.

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