The EUR/JPY pair fell as the Japanese Yen strengthened after Japan released its preliminary Q3 GDP numbers. Japan’s GDP reported a quarterly decline of 0.4%, which is better than the predicted 0.6% drop. The Euro might regain strength amid cautious feelings about the ECB’s future plans. The EUR/JPY decrease continued after reaching a high of 179.97, trading around 179.40 during the Asian trading session. The currency pair struggled as the Japanese Yen remained stable, boosted by GDP results that were not as negative as expected.

Japan’s GDP and Its Impact

Japan’s GDP dropped 0.4% in Q3 compared to a 0.6% growth in the previous quarter, but it was better than the anticipated 0.6% decline. Year-on-year, Japan’s economy contracted by 1.8%, which was better than the expected 2.5% drop, following a revised 2.3% growth in the prior quarter. Prime Minister Sanae Takaichi stressed the importance of keeping interest rates low, while BoJ Governor Kazuo Ueda pointed out rising household incomes and a tightening job market. Despite this, the ECB might keep rates steady, which supports the Euro’s economic stability. Olli Rehn from the ECB emphasized the need to be aware of inflation risks, even as growth remains steady amid trade challenges. He also mentioned that strong bank buffers and a careful policy approach are essential. As EUR/JPY pulls back from its multi-decade high near 180.00, caution is advised. The decline occurred after Japan’s Q3 GDP showed better-than-expected resilience, drawing attention to the Bank of Japan’s next move.

Monetary Policy and Market Implications

The main challenge for the Yen is conflicting official guidance. Governor Ueda’s hints at a potential near-term rate hike align with recent data showing core inflation in Japan at 2.1%, just above the 2% target. However, the Prime Minister is advocating for low rates, leading to significant uncertainty in policy. This uncertainty may lead to increased volatility in the coming weeks. Traders should monitor market expectations for the BoJ’s December meeting, which currently reflects a nearly 40% chance of a rate hike. Such a move would surprise the market. In contrast, the Eurozone appears more stable, with the ECB expected to keep its key rate at 3.75%. Eurozone inflation remains steady at 2.3%, and the economy is managing despite trade challenges. This foundation supports the Euro, but doesn’t provide significant momentum for a major rally. The large difference in interest rates between Europe and Japan has driven the long rally in the pair. History shows that carry trades can unwind quickly, as seen in the market reversals of 2008. A sudden change from the BoJ could trigger a fast decline in EUR/JPY. Since the pair is stalling near a significant psychological level, traders should consider strategies to protect against a sudden drop. Buying put options could be a smart way to gain downside exposure if the BoJ becomes hawkish. This strategy allows traders to benefit from a decline while limiting risks if the upward trend resumes unexpectedly. Create your live VT Markets account and start trading now.

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