The Euro is currently trading in a stable range against the Yen following a recent trade agreement between the US and Japan. The EUR/JPY is holding above 172.00, but the Euro is under pressure as traders look forward to the ECB’s decision and continue trade talks. The Yen gained strength mid-week after the US-Japan trade deal announcement, which includes a 15% tariff and $550 billion in Japanese investments into the US. However, the Yen’s gains were somewhat limited due to rumors about Prime Minister Shigeru Ishiba’s possible resignation, which he later denied.

Euro vs. Yen Faces Challenges

The Euro has not reacted much to the Yen’s movements and remains under pressure from stalled trade talks and the upcoming ECB policy decision. Despite two months of consistent gains, the EUR/JPY could correct itself, as technical indicators suggest it may be overbought. FAQs explain that tariffs are customs duties aimed at supporting local industries by making imports more expensive. Unlike taxes, tariffs have different methods of application and collection. Opinions on tariffs vary; some see them as wearing a protectionist label, while others warn about their potential long-term economic effects. Former US President Donald Trump’s tariff policy aimed to strengthen the US economy by targeting major trade partners like Mexico, China, and Canada, which helped generate revenue for reducing personal income taxes.

Potential Breakout on the Horizon

The EUR/JPY pair is at a crucial point, facing opposing pressures from Europe and Japan. The support level above 172.00 appears fragile, as upcoming economic decisions and political changes might increase market volatility. Derivative traders should be ready for a possible breakout from this trend. The Euro’s momentum is being tested ahead of the European Central Bank’s policy meeting. Recent flash estimates indicate Eurozone inflation held steady at 2.4% in May 2024, which has made officials cautious about planned rate cuts. This uncertainty could cap the Euro’s gains and increase risks for holding long positions. In Japan, political factors could unexpectedly strengthen the Yen, adding pressure to the currency pairing. Prime Minister Fumio Kishida’s approval rating is around a record low of 24%. Any political changes could lead to a flight-to-safety toward the Yen. This political risk, along with the Bank of Japan’s gradual shift away from very loose monetary policies, supports the Yen’s position. Given the signals of potential corrections from overbought conditions, traders might consider buying put options on EUR/JPY. This strategy offers a way to profit from a decline in the pair’s value while limiting potential loss to the premium paid, making it a defined-risk approach to take advantage of a downturn. Historically, when the ECB and the Bank of Japan have divergent monetary policies, significant trends in this currency pair have occurred, similar to the large moves seen between 2012 and 2015. We may be entering another cycle where central bank actions drive strong directional changes. Positioning ahead of this potential shift could be beneficial. Lastly, the possibility of renewed tariff discussions—a strategy previously favored by the former US president—presents a considerable external risk. These protectionist measures could disrupt global trade and push investors towards safe-haven assets like the Yen, negatively impacting risk-sensitive currencies like the Euro. This global risk further suggests a cautious or bearish outlook on the pair. Create your live VT Markets account and start trading now.

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