EUR/JPY edged down to about 185.10 in Asian trading on Tuesday, after small gains the day before. The move came as the Euro weakened amid ongoing uncertainty in the Middle East linked to Iran.
The Euro’s fall was limited by recent remarks from ECB policymaker Yannis Stournaras, who said a modest interest-rate rise could curb inflation without harming the economy. In a Reuters poll, about 85% of economists expected the ECB to raise its deposit rate by 25 bps to 2.25% in June, up from just over half before the April meeting.
Yen Weakness Despite Strong Growth
The pair also found support as the Japanese Yen stayed soft despite better-than-expected Japan growth figures. Japan’s GDP rose 0.5% quarter-on-quarter in Q1 2026, up from a downwardly revised 0.2% in Q4 2025 and above the 0.4% forecast, the strongest rise since Q3 2024.
On an annualised basis, GDP grew 2.1% in Q1, up from a downwardly revised 0.8% in the prior quarter and above the 1.7% forecast, the fastest in six quarters. Economy Minister Minoru Kiuchi said the government would act quickly while tracking the effects of the Middle East conflict and price rises on households and firms.
EUR/JPY is hovering around 185.10, showing a slight dip due to ongoing uncertainties in the Middle East. This presents a potential entry point, as the Euro’s weakness appears temporary when compared to underlying fundamentals. The market seems to be reacting more to immediate headlines than long-term policy direction.
We see a strong case for the Euro to strengthen in the coming weeks. Recent data showed Eurozone core inflation for April 2026 holding at 3.1%, well above the European Central Bank’s target. With an 85% market expectation for a 25 basis point rate hike in June, this policy tightening should provide significant support for the currency.
Conversely, the Japanese Yen is unlikely to find strength, even with Japan’s impressive 2.1% annualized GDP growth in the first quarter. Japan’s national core CPI for April came in at 1.9%, still shy of the Bank of Japan’s sustainable 2% goal. This gives the central bank cover to maintain its ultra-loose monetary policy, widening the interest rate differential with Europe.
Policy Divergence And Trading Implications
This divergence in central bank policy is a familiar pattern for us. We saw a similar situation throughout 2025 when the ECB began signaling tightening while the BoJ held firm, driving EUR/JPY from the low 170s to its current levels. History suggests this trend has momentum and could continue pushing the cross higher.
For derivative traders, this environment favors long positions on EUR/JPY. Buying call options with July or August 2026 expiries allows for capturing the expected upward move driven by the June ECB meeting. A bull call spread could also be an effective strategy to reduce the upfront premium cost while still profiting from a rise toward the 188-190 levels.
The primary risk to this outlook remains a significant escalation in the Middle East, which could trigger a flight to safety and strengthen the Yen unexpectedly. Traders should also monitor upcoming ECB communications closely for any sign of hesitation regarding the June rate hike. These factors could quickly invalidate the bullish thesis.
