EUR/JPY is trading positively around 172.60 early in the European session. The strong upward movement is supported by a bullish trend above the 100-day EMA and a solid RSI. Resistance is at 173.11, while initial support is found between 172.00 and 171.90. Political uncertainty in Japan is affecting the Yen, especially after the Liberal Democratic Party lost control in the upper house. This situation allows the EUR/JPY cross to rise to about 172.60, supported by fiscal worries in Japan. The pair looks strong on daily charts, remaining above key moving averages.

Potential Gains And Risks

If momentum continues, further gains may challenge the 173.11 level, pushing towards targets at 173.75 and 174.52. On the downside, falling below the support could lead to a drop to 170.81 and possibly 170.00. The Japanese Yen’s value reflects Japan’s economic performance and the Bank of Japan (BoJ) policies. Although currency interventions are rare, the Yen has weakened due to differences in policies with major banks. Recently, a narrowing of this gap has helped support the Yen. Market sentiment plays a significant role as well. The Yen acts as a safe-haven currency, often gaining strength during global market stress. These factors all affect the Yen’s value against other currencies in different market conditions. Given the current bullish momentum, traders might consider strategies that take advantage of a potential move toward the 173.11 resistance level. Buying near-term call options could be an easy way to benefit from this positive trend. The strong RSI and the trading position above important moving averages reinforce this optimistic view.

Diverging Central Bank Policies

It’s important to consider diverging central bank policies. The European Central Bank lowered interest rates in early June 2024, indicating a possible easing cycle. This is in stark contrast to the growing belief that the Bank of Japan may soon need to tighten its policy. Japan’s core inflation rate, which excludes fresh food, was 2.5% in May 2024, staying at or above the BoJ’s 2% target for the 26th consecutive month. This ongoing inflation puts pressure on Governor Ueda to think about raising rates, possibly in the third quarter. Such a decision would strengthen the Yen and challenge the current trend in the currency pair. We must also consider the government’s readiness to intervene, as seen with the 9.79 trillion yen intervention in April and May 2024 to support the Yen. This history suggests that as the pair rises, the risk of abrupt government action increases. Holding unhedged long positions becomes riskier with each upward movement. The political situation adds more uncertainty. Prime Minister Kishida’s approval ratings have dropped below 20% in some polls. This low popularity could cause fiscal delays that weaken the Yen further. Alternatively, it might lead to major policy changes aimed at winning back public support. Thus, we see value in using option spreads to manage this uncertainty. A bull call spread, for example, could allow traders to gain from a moderate rise toward 173.75 while limiting potential losses. This strategy offers a balance between the bullish technical signals and the substantial fundamental and political risks of a sudden market reversal. Create your live VT Markets account and start trading now.

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