The EUR/JPY exchange rate rises to about 178.00 in the early European session on Monday. Traders are looking forward to the German IFO Business Survey data. Concerns about Japan’s fiscal policies and the possibility of more spending measures from the new Prime Minister are weakening the Japanese Yen against the Euro. Reports suggest that Prime Minister Takaichi might introduce a stimulus package larger than the previous 13.9 trillion yen program. Expectations for significant fiscal expansion and uncertainty around the Bank of Japan’s (BoJ) policies are boosting the EUR/JPY rate.

Current BoJ Policies and Eurozone Politics

The BoJ is likely to keep its interest rate at 0.5% in Thursday’s meeting. Traders will closely watch Governor Ueda’s comments for new information. At the same time, political tension in France could pose a risk to the Euro if the Socialist party calls for a no-confidence vote against Prime Minister Sébastien Lecornu. Analysts expect the European Central Bank (ECB) to maintain interest rates in its next meeting. José Luis Escrivá, a member of the ECB Governing Council, expressed contentment with current borrowing costs. The performance of the Japanese Yen depends on several economic factors, including the BoJ’s policies, US-Japan bond yield differences, and global risk sentiment. The Yen, considered a safe-haven currency, tends to strengthen during uncertain times, providing a secure investment option. With the EUR/JPY exchange rate nearing 178.00, the market currently favors the Euro due to a significant interest rate gap. The ECB’s rate is at 4.25%, compared to just 0.5% for the BoJ, making it more profitable to hold Euros than Yen. This “carry trade” remains the primary force driving the pair higher.

Strategic Considerations in the EUR/JPY Market

The weakening of the Japanese Yen is driven by expectations of a large government spending plan from the new Prime Minister. We are watching the BoJ meeting on Thursday, but after a slow approach to rate hikes since 2024, traders do not expect any bold moves to strengthen the currency. This uncertainty keeps pressure on the Yen. Meanwhile, the ECB is expected to keep interest rates steady in its meeting on Thursday. With Eurozone inflation at 2.8% for September, significantly above the 2% target, the ECB has little reason to cut rates. This stable policy outlook supports the Euro. However, we should keep an eye on the political risks in France, where the government may face a no-confidence vote. For now, this seems manageable, especially after today’s German IFO Business Survey came in at 89.5, slightly above the forecast of 89.2, showing some strength in the Eurozone’s largest economy. Over the past year, the pair has rallied from around 165.00, indicating a very strong trend. Given this situation, buying call options on EUR/JPY appears to be a smart strategy to benefit from future growth while managing risk. This allows traders to take advantage of the ongoing trend driven by interest rate differences. To guard against surprises from the BoJ or political issues in France, using put options as a hedge could be a wise choice. Create your live VT Markets account and start trading now.

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