EUR/JPY fell by 0.50% on Tuesday, settling around 177.10 after reaching a multi-year high of 178.23. This decline interrupted a five-day winning streak as interest in the Japanese Yen grew, spurred by a US-Japan agreement to improve the rare earth supply chain amid China’s recent export restrictions. The Yen gained appeal following this agreement, which Japan’s Prime Minister called a “golden age,” set against ongoing geopolitical tensions. Financial markets are now focused on the upcoming Bank of Japan (BoJ) meeting, where there’s speculation about a possible rate increase, as the Services Producer Price Index rose to 3% year-over-year in September.

Eurozone Economic Challenges

The Euro is facing difficulties after Standard & Poor’s downgraded France’s credit rating due to political uncertainties. Furthermore, an ECB survey showed a slight drop in inflation expectations, indicating interest rates may remain at 2% during the ECB meeting. Many will be watching ECB President Christine Lagarde for clues about the central bank’s strategy as Europe starts to recover economically. In currency exchanges, the Euro was strongest against the British Pound today, with various percentage changes seen among major currencies. This data reflects performance and sentiment in global currency markets. Given the sharp decline of EUR/JPY from its recent high, there appears to be an opportunity for downside exposure. The recent drop back to the 177.10 level suggests a shift in momentum, creating a good entry point for short positions. Traders might consider buying EUR/JPY put options that expire in the coming weeks to take advantage of a potential further decline.

Key Considerations for Traders

The case for a stronger Yen is building ahead of the BoJ meeting this Thursday. Japan’s core inflation has remained above the 2% target for 18 months, with the latest data from September 2025 showing a 2.8% increase year-over-year. This ongoing price pressure, along with recent acceleration in services producer prices, gives the BoJ a solid rationale to indicate another rate hike. In contrast, the Euro is under pressure due to political and economic challenges. The unexpected downgrade of France by S&P adds risk, and recent data points to a sluggish recovery, as the flash Eurozone manufacturing PMI for October 2025 registered a contraction at 48.5. With the ECB likely to maintain its rate at 2.0% this week, the policy gap between a hawkish BoJ and a patient ECB is widening. The new US-Japan mineral agreement also strengthens the Yen’s role as a safe-haven asset. Geopolitical tensions with China over strategic materials typically lead to a flight to safety, which is similar to what happened during trade escalations in the late 2010s. This political context acts as an additional boost for Yen strength against other major currencies. Given this fundamental divergence, we should prepare for increased volatility around central bank announcements this Thursday. Establishing bearish positions, like buying puts or selling call spreads on EUR/JPY, could be a smart strategy to capitalize on the growing pressure on this currency pair. The key is to be ready for a hawkish surprise from the BoJ amidst ongoing caution from the ECB. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now