ECB’s Stance and Policy Divergence

The ECB aims for a 2% inflation target. Interest rate decisions will be based on economic data and inflation forecasts. ECB President Christine Lagarde mentioned that there has been no talk of changing interest rates due to current uncertainties. The market is focused on the Bank of Japan (BoJ), which is expected to raise rates by 0.25%, increasing them from 0.50% to 0.75%. The Euro’s performance against other currencies varied, showing its strongest gains against the New Zealand Dollar. The rate chart provides details on percentage changes between major currencies, including the Euro and US Dollar. Check the percentage change chart for detailed insights into currency performance. Currently, there’s a clear difference in policy between the European Central Bank and the Bank of Japan. The ECB is cautious and holding its ground, while the BoJ is expected to raise interest rates soon. This backdrop suggests that the EUR/JPY pair may continue to weaken in the short term.

Strategies and Market Volatility

The BoJ’s anticipated 0.25% rate increase is supported by strong domestic data, making this move credible. Previous wage increases during the 2024 and 2025 “Shunto” negotiations boosted spending. Japan’s core inflation was steady at 2.7% in November 2025, making a case for tightening. The market has mostly adjusted for this hike, so attention will shift to the BoJ’s guidance for 2026. In contrast, the ECB’s choice to keep its deposit facility rate at 2.00% shows a much weaker economic outlook. This marks a big change from the policy highs of 2023, influenced by falling inflation across the Eurozone. Recent data revealed headline inflation in the Eurozone dropped to 2.1% in November 2025, giving the ECB the flexibility to be patient and even suggest future cuts. For those trading derivatives, now is a good time to consider bearish positions on EUR/JPY. Purchasing put options may be a smart strategy, as it allows speculation on price drops while capping potential losses. This approach can be especially useful during the holiday season, when lower liquidity can lead to unexpected price changes. We should also keep in mind that implied volatility is likely to rise around tomorrow’s BoJ announcement. Higher volatility can increase option costs, prompting traders to consider put spreads to minimize upfront fees. The goal will be to prepare for a drop in the pair once the BoJ confirms its hawkish stance. Looking ahead, we will focus on the future guidance from both central banks. Any signals from Governor Ueda about a more aggressive rate hike in early 2026 would increase downward pressure on EUR/JPY. In addition, any weak economic data from the Eurozone would strengthen the ECB’s cautious position, further impacting the Euro. Create your live VT Markets account and start trading now.

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