The EUR/JPY rate has climbed close to 176.00 as Japan gets ready to confirm Sanae Takaichi as the new prime minister. The Japanese Yen has weakened due to the Liberal Democratic Party forming a coalition with the Japan Innovation Party to push through new fiscal policies. There are concerns about how stable this coalition will be and how strict Takaichi may be. Additionally, Bank of Japan board member Hajime Takata has mentioned it might be time to raise interest rates, although they are expected to stay the same for now.

EUR/JPY Appreciation

The EUR/JPY exchange rate is rising, partly because demand for safe-haven currencies has fallen amid easing tensions between the U.S. and China. U.S. President Donald Trump hopes for a “fair deal” with China’s President Xi Jinping, even though there are still disputes over tariffs and technology. The Euro is under pressure against other major currencies after S&P Global Ratings downgraded France’s credit rating from AA- to A+. This downgrade is due to budget uncertainties, despite France submitting its 2025 draft budget. Central banks set interest rates to control lending and inflation. Higher interest rates often boost a country’s currency and can lead to a decrease in gold prices because of the increased opportunity cost of not investing in other assets. The Federal Reserve influences U.S. monetary policy using the Fed funds rate. With EUR/JPY nearing 176.00, we see a traditional conflict for the Yen. The new government’s plans for fiscal spending, which generally weaken a currency, are clashing with the Bank of Japan’s suggestions about possibly raising rates. Japan’s core inflation has reached 2.1%, giving the central bank a reason to think about tightening policy, even if they hold off next week.

Investment Strategies

Traders looking to capitalize on this upward trend might think about buying EUR/JPY call options with strike prices near 177.00. This suggests that the new government’s spending plans will outweigh the Bank of Japan’s hints about tightening, likely leading to a weaker Yen in the short term. The yield on 10-year Japanese Government Bonds has climbed to 1.15%, reflecting expectations of increased government borrowing for these policies. However, there is considerable uncertainty, so considering a strategy that benefits from volatility could be wise. Recall how the Yen unexpectedly surged in late 2023 when the Bank of Japan adjusted its policy, highlighting the potential for surprises. A straddle strategy, which involves purchasing both a call and a put option, could profit from a large price swing in either direction if the new Prime Minister or the Bank of Japan makes an unexpected move. We also need to keep in mind the Euro’s weakness following S&P’s downgrade of France’s credit rating. This may limit how high the EUR/JPY can rise as concerns about Eurozone stability increase. The gap between French and German 10-year bond yields has widened by 15 basis points to 65 basis points this month, indicating investor worry. Additionally, reduced demand for safe-haven assets is putting pressure on the Yen. As long as U.S.-China negotiations seem positive, investors are less inclined to invest in traditional safe assets like the Yen. However, since trade wars began in the late 2010s, market sentiment can change suddenly due to a single news story, making this support for the pair quite fragile. Create your live VT Markets account and start trading now.

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