The Euro’s drop against the Japanese Yen stopped at 176.65, allowing it to rise again above 177.30. This increase supports the overall positive trend for the Euro. The Yen’s earlier gains have faded as markets wait for announcements about monetary policies from the Federal Reserve, the Bank of Japan (BoJ), and the European Central Bank (ECB). The BoJ is expected to keep interest rates at 0.5%, though hikes may come in December or January due to increasing calls for immediate cuts.

European Central Bank Policy

The European Central Bank is likely to maintain its main interest rate. The key question is whether the bank has finished easing or if more reductions could happen. Under Prime Minister Takaichi, Japan’s wide-ranging monetary policy has been noted, but the independence of the Bank of Japan is emphasized, leading to pressure for policy normalization. Since 2013, the BoJ’s policy of Quantitative and Qualitative Easing tried to boost inflation. The Yen weakened significantly due to differing policies with other banks until the BoJ began moving out of its ultra-loose approach in 2024, spurred by inflation rising above the 2% target.

Interest Rate and Market Reactions

With EUR/JPY staying above 177.00, we’re closely watching the expected volatility around the Bank of Japan’s announcement. The implied volatility for one-week JPY options has jumped, making it costly to buy new positions like straddles before the announcement. Right now, caution is key, so it’s not an ideal time to make big new bets ahead of Governor Ueda’s statement. The market expects rates to stay at 0.5%, but we’re keen on the forward guidance and the number of dissenters. Japan’s core inflation has remained sticky at about 2.8% in the last quarter, giving hawkish board members more support. If dissenters calling for a hike increase from one to three, it could signal a move by year-end and spark a strong rally for the Yen. The interest rate gap between the ECB and Fed, which are still much higher than Japan’s, makes shorting the Yen appealing for carry trades. However, we must remember the late 2024 volatility, when similar hike expectations fizzled out, causing a sudden sell-off in the Yen after a brief rise. This history suggests that any dovish comments from Ueda could lead to sharp market reactions. Given the high cost of options, we find strategies like call spreads on pairs such as EUR/JPY or USD/JPY to be more valuable. This way, you can position for more Yen weakness if the BoJ disappoints, limiting upfront costs while still capturing upside if the bullish trend continues. On the other hand, traders expecting a hawkish surprise could use put spreads to lower their entry costs for a long-Yen position. We should also pay attention to the ECB’s decision, which comes after the BoJ’s announcement. Any indication that the ECB has finished its easing cycle could give the Euro an extra boost. This scenario could lead to a dovish BoJ and a steady or hawkish ECB, potentially driving EUR/JPY much higher in the weeks to come. Create your live VT Markets account and start trading now.

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