Market Expectations

Market expectations for a possible rate hike by the Bank of Japan (BoJ) are helping to limit the decline of the Yen. The Yen’s reputation as a safe haven increases its importance during times of market stress. The EUR/JPY pair is trading above the 20-day SMA and the 100-day EMA, continuing its upward trend. It is also above the middle Bollinger Band, which suggests lower volatility and a consolidating trend. A close above the upper band indicates potential gains, while dropping below the mid-band could test the lower band and the 100-day EMA. The BoJ has historically kept a very loose monetary policy, unlike other central banks, which led to the Yen losing value. Now, as this policy shifts, the narrowing interest rate gap is providing support for the Yen. The EUR/JPY pair is strong around the 180.90 level, boosted by Japan’s weaker-than-expected GDP report for the third quarter. Technically, the pair remains in a broader uptrend, staying above important moving averages. This suggests that, for now, the easiest direction is upwards, with an initial target near 182.02.

Bank Of Japan’s Influence

Looking ahead, the Bank of Japan (BoJ) is likely to dominate the fundamental outlook in the coming weeks. The market increasingly expects a rate hike at the BoJ’s December policy meeting, a view supported by recent wage growth data. This anticipation is putting pressure on EUR/JPY despite poor GDP figures. In 2024, we witnessed similar tensions as the BoJ started to unwind its very loose policies, leading to sharp but short-lived increases in JPY strength. We believe that the upcoming meeting is a significant event that could create notable volatility. With Japan’s core inflation remaining above the BoJ’s 2% target for 19 months, confirmed by November’s 2.5% reading, the pressure to adjust policy is substantial. For derivative traders, this situation may lead to increased implied volatility as we approach the BoJ’s meeting, which we expect around December 19th. Strategies that benefit from large price swings, like long straddles or strangles, could work well. These strategies would profit from sharp movements in either direction, whether the BoJ raises rates or surprises the market with a dovish statement. For those who believe the BoJ will be hawkish, purchasing put options on EUR/JPY provides a lower-risk way to bet on a stronger Yen. If the pair breaks below the initial support level of 178.98 after the meeting, it could cause a sharper decline towards the 100-day EMA. It’s important to manage risk carefully ahead of significant events like changes in central bank policies. Conversely, the European Central Bank seems to be maintaining its current stance, with recent comments indicating no policy changes until at least the second quarter of 2026. This policy difference means that the focus is mainly on the BoJ’s actions. Therefore, we expect Japanese monetary policy to be the primary driver for this pair in the coming weeks, rather than European economic factors. Create your live VT Markets account and start trading now.

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