The EUR/JPY pair has dropped to around 183.80 in early European trading on Monday. This decline comes as the Japanese Yen gains strength against the Euro, following discussions from the Bank of Japan (BoJ) that hint at possible policy tightening in 2026. In December, the BoJ raised its policy rate to 0.75%. Some board members see the need for future rate increases, which strengthens the Yen and challenges the EUR/JPY cross. They noted that Japan’s weaker currency and rising interest rates are partly due to the BoJ’s relatively low policy rate.

The ECB’s Stance

The European Central Bank (ECB) is keeping interest rates steady, likely maintaining this approach as it relies on data. Indicators suggesting the end of the rate cut cycle could help lessen Euro losses. Traders are expecting a 25 basis points rate cut from the ECB by February 2026, but the probability is currently less than 10%. The Yen’s value is shaped by BoJ policies, the bond yield gap between Japan and the US, and overall market risk sentiment. BoJ decisions have a big impact on the Yen. Past ultra-loose policies led to its decline against other currencies. As the BoJ shifts its policy, the Yen has gained strength. It is seen as a safe haven during market turbulence, attracting traders in uncertain times. With the Bank of Japan hinting at more rate hikes, we may see the Yen strengthen further in the coming weeks. This could mean it’s time to consider bearish positions on the EUR/JPY pair. Derivative traders might look into buying put options with strike prices below the current level of 183.80 to take advantage of this expected decline.

Inflation And Its Impact

The BoJ’s firm stance is backed by ongoing inflation in Japan, which remains above the target. As of November 2025, core inflation is still at 2.9%, supporting the BoJ’s recent rate hike and sparking discussions about another move in early 2026. This stands in stark contrast to two years ago when rates were still negative. Conversely, while the Euro has shown some weakness, its decline might be limited. The Eurozone’s flash CPI for December 2025 was a modest 2.1%, leaving the ECB little reason to change its data-focused strategy. This gives the Euro a floor against falling but not much upward momentum against a stronger Yen. The narrowing interest rate difference is crucial to monitor. The gap between 10-year Japanese Government Bonds and German Bunds has tightened by 15 basis points over the last month, making the Yen a more appealing option. This shift marks a significant change from the widening spreads that contributed to Yen weakness for much of 2022 and 2023. Given this outlook, we are preparing for a decline in the EUR/JPY, potentially toward the 182.00 support level. The options market indicates this sentiment as the one-month put-to-call ratio has risen to 1.3, showing more bearish bets than bullish ones. Implied volatility has also increased to 9.5%, suggesting the market is anticipating larger price movements in January. Create your live VT Markets account and start trading now.

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