The Euro (EUR) is trading a bit lower against the Japanese Yen (JPY) on Wednesday, ending a three-day winning streak. The Yen is gaining strength due to stronger domestic demand and cautious trading as Japan prepares for its Upper House election on July 20. EUR/JPY has dropped from a new yearly high of 173.25 and is now around 172.00. This decrease is largely because of profit-taking and a stable Yen affecting the pair.

Japanese Bond Yield Spike

On Wednesday, Japan’s 10-year government bond yield rose to nearly 1.6%, its highest level since 2008. As the election nears, there are expectations for increased fiscal spending, which may include stimulus measures like reducing the consumption tax. Comments from ECB official Joachim Nagel did not help the Euro. He called for stability amid trade tensions and inflation risks, suggesting rates will likely stay the same at the next ECB meeting. This week, important economic data is due, including inflation figures for the Eurozone and Japan’s CPI. These reports may impact the movements of the EUR/JPY pair. The Core Harmonized Index of Consumer Prices (HICP) will be released on Thursday, July 17, 2025. This index is crucial for tracking inflation trends in the European Monetary Union and is published monthly by Eurostat. As we see the pullback from the yearly high, we believe this could be a turning point rather than simple profit-taking. The strengthening Yen seems to be influenced by fundamental changes. Derivative traders should consider the 173.25 level as a key resistance point in the near future.

Yen Momentum

The Yen’s strength appears to be gaining momentum. Japan’s core inflation for May jumped to 2.5%, surprising many and putting pressure on the Bank of Japan to adjust its policy. The surge in Japanese government bond yields to levels not seen since 2008 supports this outlook of a potential hawkish shift. On the other hand, the Euro seems to be facing challenges. Recent remarks from the European Central Bank official calling for stability align with May’s core inflation data, which only slightly increased to 2.9%. This indicates there’s little urgency for the ECB to adopt a more aggressive stance, limiting the Euro’s potential against other currencies. Historically, the significant interest rate gap has encouraged a large carry trade, where traders borrow Yen to buy Euros, pushing the pair to recent highs. However, current dynamics suggest this popular strategy is becoming risky. If there’s an unwinding of these positions, it could result in a sharp decline for EUR/JPY. Therefore, we advise positioning for potential declines in the upcoming weeks. Buying put options on EUR/JPY is a straightforward way to profit from a drop while managing risk, allowing traders to safeguard against a fall below the current 172.00 support level. Next, keep an eye on the upcoming economic reports, especially the Japanese CPI and the Eurozone flash HICP inflation estimate due on July 2. These figures will be vital in determining whether the pair will drop further or try to reach previous highs again. We will monitor these releases to confirm our bearish perspective. Create your live VT Markets account and start trading now.

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