EUR/JPY is currently at 176.40, down by 0.35% after hitting a record high of 177.94. The Euro is losing strength as French President Macron struggles to unite the opposition before appointing a new Prime Minister. Political instability in France is affecting the Eurozone. Prime Minister Sébastien Lecornu’s resignation raises concerns about the fiscal deficit. Macron is having difficulty finding a consensus, which may delay pension reform and increase political uncertainty.

Leadership Change In Japan

In Japan, Sanae Takaichi’s recent win in the Liberal Democratic Party has sparked hopes for fiscal stimulus and ongoing loose monetary policy. While the Bank of Japan aims for independent policy, tensions remain as the Komeito party leader threatens to leave the coalition. Japanese Finance Minister Kato has committed to keeping an eye on Yen volatility, indicating possible foreign exchange intervention. EUR/JPY is feeling pressure from both Eurozone political issues and Japan’s fiscal strategies. The Euro’s performance against major currencies shows mixed results. It strengthens by 1.50% against the Australian Dollar but drops by 0.36% against the US Dollar. Currency heat maps reveal percentage changes, showing how the Euro is affected by different currencies. The left column shows the base currency, while the top row shows the quote currency.

Market Reactions And Risk Management

The drop in EUR/JPY from its peak indicates strong market reactions to the political instability in France. The gap between French 10-year government bonds and German bunds has expanded to over 65 basis points this week, indicating rising risk aversion towards French assets. Traders should brace for further Euro weakness in the short term. The surge in uncertainty makes options strategies appealing in the coming weeks. The Cboe EuroCurrency Volatility Index (EVZ) has risen by 12% since the French Prime Minister’s resignation, suggesting larger price swings ahead. Buying EUR/JPY put options may be a smart move to benefit from potential drops while managing risk. On the other side of the pair, Japan’s new Prime Minister brings her own uncertainties with promises of fiscal stimulus, which could negatively impact the Yen. However, officials are hinting at foreign exchange intervention, reminding us of past actions in late 2022 to support the currency. This threat of intervention could help stabilize the Yen and prevent significant depreciation against the Euro. The combination of Euro weakness and a potentially stronger Yen suggests continued volatility. The one-month 25-delta risk reversal for EUR/JPY shows an increasing bias for puts, meaning traders are hedging against a decline. For those unsure about market direction, a long straddle or strangle could be beneficial in taking advantage of expected price movements, no matter the direction. Global factors, like renewed US-China trade tensions, also advise caution with risk assets. In such an environment, the Japanese Yen often attracts safe-haven flows, which could exert further downward pressure on the EUR/JPY cross. We should keep a close watch not only on European politics but also on these global risk indicators. Create your live VT Markets account and start trading now.

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