EUR/JPY increased as the Yen weakened due to lower Japanese Government Bond (JGB) yields after a successful 10-year auction. This ended a three-day slide, with EUR/JPY trading around 186.29. Japan’s 10-year yield recently reached 1.88%, the highest since 2006, thanks to hawkish comments from BoJ Governor Kazuo Ueda. Higher JGB yields raise Japan’s debt-servicing costs, which may restrict the Bank of Japan’s (BoJ) ability to tighten its policies. However, Tuesday’s auction eased some yield pressures, showing a bid-to-cover ratio of 3.59, better than November’s 2.97 and the year-long average of 3.20. The BoJ is expected to make a policy decision on December 18-19, with an 80% chance of increasing the rate to 0.50%. Japanese Finance Minister Shunichi Katayama believes the BoJ will pursue the right monetary policy to hit its price target, indicating coordination between the government and BoJ. In the Eurozone, steady inflation data supports the idea that the ECB will keep its current policy. The Harmonized Index of Consumer Prices rose by 2.2% year-on-year in November, slightly above predictions, and the Eurozone unemployment rate remained steady at 6.4% in October.

Current Market Outlook

Today, the Yen is weakening due to a successful government bond auction that has temporarily lowered yields. This short-term trend contrasts with the expectation that the BoJ will raise interest rates soon. The clash between this short-term market noise and long-term policy expectations creates clear opportunities for traders. The key event to watch is the Bank of Japan’s meeting on December 18-19. Markets are anticipating a strong chance of an interest rate hike. Recent data shows that Tokyo’s Core CPI for November 2025 stayed at 2.5%, above the BoJ’s 2% target for over a year and a half. An interest rate hike would likely strengthen the Yen, causing the EUR/JPY pair to drop. Given this outlook, a good strategy is to consider buying put options on EUR/JPY that expire after the BoJ meeting. This allows you to bet on the pair falling while limiting your maximum loss to the price of the option. Keep in mind that implied volatility might be high, making these options more expensive as the meeting approaches.

Market Risks and Considerations

However, we should remember the market’s reaction to the BoJ’s significant rate hike in March 2024, when the Yen weakened because the news was already anticipated. There’s a risk that even if the BoJ raises rates, a “sell the fact” reaction could happen if their future guidance isn’t strong enough. This suggests the initial market movement could be surprising. There’s also a major risk if the BoJ doesn’t deliver the expected rate hike. The latest Commitment of Traders report shows that many traders are heavily positioned against the Yen. A dovish surprise from the BoJ could lead to a sharp short squeeze, pushing EUR/JPY significantly higher. On the Euro side, there’s little volatility, which allows the Yen to be the main focus. Eurozone interest rate markets indicate traders expect no policy changes from the European Central Bank for the next few months. This stability in the Euro makes the EUR/JPY pair a clearer way to trade based on expectations for the BoJ’s upcoming decision. Create your live VT Markets account and start trading now.

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