EUR/JPY rose to about 182.15 after a two-day decline, as the Japanese Yen struggled. The European Central Bank is expected to keep its interest rates steady, while the Bank of Japan is likely to increase borrowing rates by 25 basis points. In early European trading, EUR/JPY gained 0.25% as the Yen weakened, despite the expected BoJ rate hike. Still, the Yen remained the weakest among major currencies, particularly against the US Dollar.

BoJ Rate Hike Anticipation

The expected rate hike from the BoJ comes after comments from Governor Kazuo Ueda, which indicate the bank is close to its inflation target. Market watchers are eager to hear about the timing of the next rate increase. While the Euro is holding its ground against the Yen, it lags behind other major currencies as the ECB prepares for its decision. Analysts will be closely watching for hints about how long the ECB will keep the Deposit Facility Rate at 2%. On the economic front, Germany’s IFO Business Climate Index unexpectedly fell to 87.6 in December. The ECB’s deposit facility rate, a core interest rate, is determined in its scheduled meetings, reflecting the interest banks earn on ECB deposits. The rise of EUR/JPY above 182.00, just before the anticipated BoJ rate hike, suggests that the market has already adjusted for this 25 basis point increase. Historically, we have seen the yen weaken on actual news after strengthening on rumors. Japan’s national core CPI for November was 2.1%, slightly lower than in October, which cools enthusiasm for a long and aggressive rate hike cycle.

Challenges Facing The Euro

However, the Euro faces its own challenges despite being strong against the Yen. The unexpected decline in the German IFO Business Climate to 87.6 is concerning for the Eurozone’s largest economy. Additionally, recent data shows that the S&P Global Eurozone Manufacturing PMI remained below 50 at 48.5 last month, with headline inflation easing to 2.3%. For derivative traders, this creates a classic situation for volatility around the central bank meetings this week. Implied volatility on one-week EUR/JPY options has increased to a three-month high, indicating uncertainty. A long straddle could be a good strategy to benefit from a significant price shift, whether the BoJ opts for aggressive guidance or the ECB turns out to be more dovish than expected. Looking ahead to early 2026, the main theme remains the differing policies of a slowly tightening BoJ versus a steady ECB, which may need to consider cuts if economic conditions worsen. We remember that after the BoJ ended negative interest rates in the spring of 2024, the yen weakened in the weeks that followed because the market didn’t find the path forward aggressive enough. Traders might think about selling out-of-the-money EUR/JPY calls to take advantage of the view that this rally is overextended and might be limited by weak European economic performance. Create your live VT Markets account and start trading now.

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