The EUR/JPY currency pair has increased in value, showing less interest in the Japanese Yen as trade tensions between the US and China ease. Remarks from US President Donald Trump have reduced concerns about a potential trade war, which supports the Euro during a time of political uncertainty in France. Currently, the EUR/JPY is trading at about 176.20, reflecting a 0.25% rise. This increase is mainly due to less demand for safe-haven assets and positive news regarding US-China relations.

Market Focus Shift

Trump stated that US-China relations will remain strong, countering earlier tariff threats. This has shifted market attention to his more friendly approach, calming fears of trade conflicts. Japan is experiencing political challenges due to changes in its ruling coalition, which impacts the stability of its currency. In Europe, political tensions in France have eased with the reappointment of Sébastien Lecornu as Prime Minister and Roland Lescure as Finance Minister. However, market participants remain cautious, waiting for updates on US-China relations and developments in French politics. The recent ECB meeting minutes support its current monetary policy aimed at achieving the medium-term inflation target. Investor sentiment is cautious as they await news on global trade and political matters. The Euro has had mixed results against major currencies, performing best against the Swiss Franc. A heat map of currency changes shows the Euro strengthening against the US Dollar and weakening against currencies like the Swiss Franc.

Divergence in Monetary Policies

With renewed interest in risk on October 13, 2025, the outlook for EUR/JPY is upward in the coming weeks. The main reason for this is the clear difference in policies between the European Central Bank (ECB) and the Bank of Japan (BOJ). This divergence supports a strategy of holding long positions in the Euro and short positions in the Japanese Yen. The BOJ is likely to maintain its highly accommodative monetary policy, especially since last week’s national Core CPI data for Japan was only at 1.8%, still below the central bank’s target. This suggests the policy rate will remain at -0.1%, making the Yen a favorable choice for carry trades. The focus on fiscal expansion from the incoming Takaichi administration also indicates a weaker Yen ahead. In contrast, the Euro is gaining strength, with the ECB keeping its deposit rate at 3.0% and indicating no immediate cuts. ECB President Christine Lagarde recently stated that even though wage growth in the eurozone has moderated to 2.9% in the third quarter, it remains high enough to avoid policy easing. The recent stabilization of French politics is another plus for the Euro, as it removes a previous concern. A key risk to this outlook is the situation between the US and China as we approach the potential November 1st tariff implementation. During past tensions, we saw the VIX index spike above 30, which negatively affected risk-sensitive pairs like EUR/JPY. Traders should consider hedging their long EUR/JPY positions by buying inexpensive out-of-the-money put options or VIX call options to guard against sudden market reversals. A smart strategy would be to use options to express a positive outlook on EUR/JPY, such as purchasing call spreads. This limits risk while allowing for participation in potential gains if market sentiment remains strong. Recent data from the US Census Bureau indicated an unexpected widening of the trade deficit with China, which could empower tariff advocates in Washington. The overall calm in Europe, particularly following Prime Minister Lecornu’s reappointment in France, suggests that the Euro’s main risks now come from outside. This makes the yield differential between the Euro and Yen the key factor, as long as a full-scale trade war does not occur. We will be keeping a close eye on any updates from the US or China. Create your live VT Markets account and start trading now.

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