EUR/JPY rose after a flat previous session, trading around 186.00 in early European dealings on Tuesday as markets priced a more hawkish European Central Bank (ECB) stance ahead of the Eurozone’s preliminary Harmonised Index of Consumer Prices (HICP) release. Headline inflation is forecast to edge up to 3.2% year on year in May from 3.0% in April, a reading that could shape the ECB’s near-term rate path. ECB Executive Board member Isabel Schnabel’s comments on Monday reinforced expectations of tighter policy, citing broader price pressures beyond energy and risks to inflation expectations.
The yen weakened further, slipping past 159.5 per US dollar (USD) and moving towards 160, a level previously associated with direct Japanese market intervention that could cap EUR/JPY’s advance. Japan’s finance minister said oil-market volatility remained a concern and that authorities were ready to act if needed, while declining to indicate whether intervention was imminent and confirming contact with US counterparts. The Bank of Japan targets inflation of around 2%, deployed Quantitative and Qualitative Easing (QQE) from 2013, added negative rates and 10-year yield control in 2016, and lifted rates in March 2024 as Japanese inflation rose above target.
ECB Hawkishness And EUR/JPY Support
Given the current divergence in central bank policy, we see continued strength in the EUR/JPY cross, which is now trading around 186.50. The European Central Bank (ECB) is signaling a more hawkish stance, while the Bank of Japan (BoJ) remains cautious about raising rates further. This fundamental difference supports holding long positions in EUR/JPY.
The latest Eurozone inflation data for May just showed an unexpected rise to 2.6% year-over-year, with core inflation also ticking up to 2.9%. These figures make it very difficult for the ECB to justify any interest rate cuts in the near future, providing a solid floor for the Euro. Derivative traders should consider buying call options on the Euro to capitalize on this expected strength.
Yen Weakness And Risks Of Intervention
On the other side of the trade, the Japanese Yen’s weakness is a persistent theme. With Japan’s own core inflation hovering at a manageable 2.2%, the BoJ is not under the same pressure as the ECB to tighten policy aggressively. This widening interest rate differential will likely continue to weigh on the Yen.
The primary risk to this trade is direct intervention from Japanese authorities to support their currency. We saw them intervene heavily in the spring of 2024 when the USD/JPY rate crossed the 160 level, so the threat is credible. To manage this risk, traders should consider using protective put options on EUR/JPY or setting tight stop-losses as the pair climbs higher.
