The Euro has fallen against the Japanese Yen because the market strongly believes the Bank of Japan (BoJ) will raise interest rates in their next meeting. Currently, there’s a 94% chance of a 25 basis point rate hike, with EUR/JPY trading at about 182.27.

Economic Indicators and Central Bank Decisions

Recent data suggests the BoJ is likely to raise rates. The BoJ Tankan Large Manufacturing Index reached 15 in Q4, its highest level since 2021. Even with worries about US tariffs and rising costs, BoJ officials see positive signs, such as better cost management and strong demand for AI chip production. In the Eurozone, Industrial Production increased by 0.8% in October, beating expectations of a 0.1% rise. However, this limited the Euro’s support, even though it performed better than expected. Next, attention will turn to new Eurozone data and the European Central Bank’s (ECB) meeting, where it’s expected that all key interest rates will stay the same. The Japanese Yen has performed well against other currencies. It strengthened against the GBP, CAD, and AUD, as shown in a currency heat map. As we near the BoJ’s meeting this Friday, the Yen is gaining strength. The market is nearly certain about a 25 basis point rate hike, and the EUR/JPY pair has dropped to around 182.00. This shift shows strong confidence that the BoJ will tighten its policy. For derivative traders, buying EUR/JPY put options is a simple way to prepare for more Yen strength ahead of Friday’s decision. However, we need to be careful of a “sell the fact” situation, where the Yen could weaken after the announcement since a hike is already heavily priced in. A similar pattern occurred in March 2024 when the BoJ ended its negative interest rate policy, leading to a decline in the Yen in the following weeks.

Potential Market Reactions and Strategic Considerations

An interesting opportunity might arise from positioning for a surprise, given the market’s current outlook. A low-cost, out-of-the-money EUR/JPY call option could yield substantial returns if the BoJ surprises everyone by keeping rates steady. This could cause a sudden shift, catching most traders off guard and pushing the currency pair up sharply. On the flip side, the Euro’s movement will be impacted by Tuesday’s PMI data and the ECB’s decision on Thursday. While the ECB is likely to keep rates unchanged, inflation in the Eurozone remains strong, with the Harmonised Index of Consumer Prices (HICP) for November 2025 at 2.6%, still above the 2% target. Any unexpectedly hawkish comments from the ECB might provide support for EUR/JPY, complicating short positions. Looking ahead, the key factor will be the BoJ’s guidance on future rate hikes. Even if a hike occurs, if officials indicate a cautious approach due to concerns about labor costs and consumption, the Yen’s rally may not last long. Derivative strategies like calendar spreads on JPY futures might help trade the difference between short-term volatility and long-term policy expectations. Create your live VT Markets account and start trading now.

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