The EUR/JPY climbed close to 167.50 in early European trading on Friday. The Japanese Yen faced pressure due to uncertainty around when the Bank of Japan will next raise interest rates. Ongoing trade talks between Japan and the US remain unresolved, affecting the Yen’s value.

Bank of Japan’s Focus

The Bank of Japan is concerned about potential risks to Japan’s economy, particularly due to US tariffs. BoJ Governor Kazuo Ueda has indicated no immediate plans for rate hikes, which impacts the Yen. Meanwhile, a hawkish tone from the European Central Bank is supporting the Euro. Japan’s National CPI rose by 3.5% year-on-year in May, slightly down from 3.6% previously. The National CPI, excluding fresh food, was 3.7% YoY for May, up from 3.5%. The CPI excluding food and energy climbed to 3.3% YoY from 3.0%, exceeding market expectations and possibly benefiting the Yen. The Japanese Yen’s value is closely tied to the country’s economic conditions, the BoJ’s policies, yield differences between US and Japanese bonds, and overall market sentiment. The Yen is seen as a safe-haven currency, attracting investors during uncertain times. Given these recent developments, we anticipate ongoing volatility in the EUR/JPY pair moving forward. This is especially true as rate expectations become more distinct between the European Central Bank and the Bank of Japan. With Ueda showing patience on tightening policy, the significant interest rate gap is unlikely to close soon, which may weigh on the Yen. Conversely, the ECB’s strong stance supports the Euro, pushing the cross upward.

Macro Backdrop and Rate Differentials

Looking at the macro backdrop, Japan’s inflation figures provide a mixed view. Although the headline CPI dropped slightly, the core numbers—excluding food and energy—showed an increase. This discrepancy may pose challenges for the BoJ, making its cautious stance seem misaligned with economic data. However, comments from officials suggest that significant policy changes are not imminent. This could create an imbalance: positive surprises in Japanese data may have little impact, as the monetary authorities are slow to react, whereas dovish statements from Europe could lead to significant downward movements in the pair. The yield gap remains an important factor here. The difference in interest rates between the US and Japan, along with the BoJ’s slow actions, continues to put pressure on the Yen. Additionally, trade tensions with the US add vulnerability to Japan’s economic position and impact investor confidence. If there is any resolution or clarity on these trade discussions, it could provide a temporary boost. We observe that during times of global risk aversion, the Yen tends to rebound. As a safe-haven asset, it attracts investment during uncertainties, though these flows have become more selective and short-lived recently. Until Tokyo policymakers signal a readiness to act, any upward movement is likely to be constrained. In these situations, it’s crucial to monitor not just the main economic figures but also the tone and timing of any monetary policy responses. If Ueda continues to focus on downside risks while European officials maintain a more aggressive stance, the market’s direction could become increasingly one-sided. Pay close attention to the importance of interest rate differentials and developments in fixed income markets now. In the coming weeks, unexpected macro events could overshadow regular technical influences. For those tracking volatility or rate expectations, any significant departure from established policy paths could act as a catalyst. This is especially relevant in the quieter summer months, where market movements can become exaggerated due to lower participation. Therefore, we focus on both the timing and content of statements and how the market reacts. From a positioning perspective, holding extended longs in the currency pair carries the risk of sharp pullbacks, particularly if market sentiment changes or unexpected shocks occur. We view this as a potential trap for those entering late or chasing breakouts. The current market environment favors clear risk management and adaptability, rather than a buy-and-hold approach. Create your live VT Markets account and start trading now.

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