The EUR/JPY cross dropped to about 177.60 during Asian trading, ending a five-day rise. The Japanese Yen strengthened after US President Donald Trump and Japan’s Prime Minister Sanae Takaichi signed an agreement to secure critical minerals and rare earth supplies. This agreement comes after China tightened its export controls on these materials. Takaichi aims to strengthen US-Japan ties, which supports the JPY and impacts the EUR/JPY cross. Trump is set to meet China’s President Xi Jinping in South Korea to discuss trade.

Political Changes in France

In Europe, potential political changes in France are gaining attention. France’s Socialist Party may challenge Prime Minister Sebastien Lecornu’s government if next year’s budget doesn’t include tax hikes for the wealthy. Standard & Poor’s Global has downgraded France’s credit rating, raising concerns about political and financial stability. The European Central Bank is likely to keep borrowing costs at 2.0%, as inflation is under control and the Eurozone economy shows improvement. Everyone will be watching ECB President Christine Lagarde’s upcoming press conference for future insights. Additionally, the Bank of Japan will announce its interest rate decision on Thursday, a key event that markets will closely monitor. Currently, the EUR/JPY cross is retracting toward 177.50, breaking its winning streak. The Yen is gaining strength from the new US-Japan deal on rare earths, acting as a strategic response to China’s export controls from 2023. This agreement is seen as a long-term positive for Japan’s economic security, enhancing the Yen’s appeal.

Bank of Japan Meeting

The Bank of Japan meeting on Thursday is an important event to keep an eye on. Looking back at the BoJ’s decision to end its negative interest rate policy in March 2024, the market is now sensitive to any signs of a hawkish stance. With one-month risk reversals on USD/JPY showing a slight favor towards JPY calls, traders are preparing for potential Yen strength. This makes short positions on EUR/JPY or buying puts on the cross a promising strategy. Conversely, the Euro is under pressure due to political instability in France. This situation is not unexpected, seeing that France’s debt-to-GDP ratio remains high, finishing 2024 around 110% according to INSEE. The recent S&P downgrade confirms that investors are losing patience with political risks that might hinder fiscal recovery. The European Central Bank is anticipated to keep its interest rate at 2.0% this week, which seems fitting. Recent Eurostat data shows Eurozone inflation has been near the 2% target for the last quarter, minimizing the need for any immediate policy changes. This suggests that the main influence on EUR/JPY movement will likely stem from Japan’s situation and overall market sentiment, rather than from the ECB. Create your live VT Markets account and start trading now.

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