EUR/JPY is holding steady around 181.90 during the Asian session, recovering from two days of losses. This stability follows Japan’s trade balance surplus for November, which came in lower than expected at JPY 62.9 billion, down from JPY 74.0 billion in October. On a positive note, Japan’s exports in November grew by 6.1%, beating the forecast of 4.8% and marking the fastest growth in nine months. Core machinery orders also performed well, rising by 7%. However, imports only increased by 1.3% year-on-year, which is below the anticipated 2.5%.

Bank of Japan Policy Outlook

Traders are taking a careful stance ahead of the Bank of Japan’s (BoJ) upcoming policy update. The BoJ meeting wraps up on Friday, focusing on guiding policy until 2026, as inflation targets seem more achievable. The Euro could strengthen as expectations for further easing from the European Central Bank (ECB) in 2026 lessen after recent comments from officials. Key data, including Germany’s IFO Business Survey and the Eurozone’s Core Harmonised Index of Consumer Prices (HICP), will be important to watch. The Euro represents 20 EU countries and is widely traded globally. The ECB manages the Eurozone’s monetary policy and affects the Euro’s value by adjusting interest rates; typically, higher rates make the currency stronger. With EUR/JPY trading under 182.00, the market is feeling the pull of two opposing forces. The BoJ is expected to take action this week, while the ECB is signaling caution regarding rate cuts in 2026. This uncertainty presents an opportunity.

Expected Market Reactions

The key event is the BoJ policy meeting ending this Friday, December 19th. Strong data on Japanese exports and machinery orders has sparked expectations of a rate hike, which would strengthen the Yen and lower EUR/JPY. This is reflected in the overnight interest rate swaps market, now showing a more than 70% chance of a 10-basis-point hike from the BoJ this week. Japan’s core CPI for November came in at 2.8%, marking the 20th month above the BoJ’s 2% target. This ongoing inflation, combined with strong economic data, pressures Governor Ueda to follow through on his hawkish indicators. The market reaction was significant when the BoJ ended its negative interest rate policy back in March 2024. On the flip side, the Euro is receiving support from ECB officials who resist expectations for aggressive rate cuts next year. We will closely monitor today’s German IFO Business Survey and Eurozone HICP inflation data. The forecasts suggest a slight improvement for the German IFO to 88.1 and a steady core inflation rate of 2.4% in the Eurozone, which reinforces the ECB’s cautious approach. For derivative traders, the increase in expected volatility presents a major opportunity. Implied volatility for one-week EUR/JPY options has climbed over 15%, a level not reached since the second quarter of 2025. This suggests that strategies like long straddles or strangles, which aim to profit from big price moves in either direction, could work well around the BoJ’s decision. If we expect the BoJ to surprise with hawkish news, buying EUR/JPY put options set for late December or early January 2026 could position us for a drop below 180.00. Conversely, if we think the BoJ will adopt a dovish stance, call options might provide leveraged upside. The key is to prepare for a significant breakout from the current tight range before Friday’s announcement. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now