The Euro dropped against the Japanese Yen, reaching its lowest point in two weeks. This was fueled by expectations that the Bank of Japan (BoJ) will tighten its monetary policy further. Meanwhile, inflation in the Eurozone slightly increased, which supports the European Central Bank (ECB) in its decision to pause rate changes. On Friday, the EUR/JPY pair fell by 0.25%, trading around 175.40, after hitting a low of 174.82 earlier in the day. The Yen gained strength as BoJ officials, including Deputy Governor Shinichi Uchida and Governor Kazuo Ueda, hinted at possible policy changes.

BoJ Monetary Policy

Comments from the BoJ have increased market expectations for a rate hike by the end of the year. This difference in policy between the BoJ and other central banks is notable. Politically, Japan may face some instability with changes among leaders in the Liberal Democratic Party, particularly with Sanae Takaichi. This could influence fiscal policies but may help stabilize the Yen. Commerzbank and OCBC have pointed out that political developments can affect Japan’s fiscal and monetary policies. In France, Prime Minister Sébastien Lecornu’s survival of no-confidence votes has somewhat eased political concerns. Data from the Eurozone revealed that the Harmonized Index of Consumer Prices rose by 2.2% year-on-year in September, with core inflation at 2.4%. This trend aligns with the ECB’s viewpoint, suggesting they are nearing the end of their rate cuts. The widening policy gap between Japan and the Eurozone favors the Yen, which negatively impacts the Euro. Given the divergent paths of the hawkish BoJ and the paused ECB, there is a clear trend suggesting further weakness for the EUR/JPY pair. The pair has already broken a key short-term support level, and factors favoring a stronger Yen are becoming more apparent. Traders should prepare for this trend in the coming weeks. A simple strategy is to buy EUR/JPY put options with expiration dates in late November or December. This allows for profit from a continued decline while limiting risk to the premium paid. Target strike prices could be below the recent low of 174.82, possibly at 174.00 or 173.50.

Trading Strategy and Technical Signals

This outlook is supported by recent data showing Japan’s Q3 GDP growth unexpectedly jumped to 0.5%, giving the BoJ a reason to tighten its policy. In contrast, the ECB’s deposit facility rate has remained unchanged at 2.50% for five months, with no expected changes until at least Q2 2026. Interest rate futures indicate nearly an 80% chance that the BoJ will raise its overnight call rate to 0.25% by the year’s end. From a technical perspective, a steady drop below 174.80 would signal a strong bearish trend. This could lead to a sharper decline towards 172.00, a support level we haven’t seen since August 2025. Any small uptick in the pair should be used as an opportunity to strengthen bearish positions. A similar situation occurred in early 2024 when the BoJ moved away from its negative interest rate policy. That change caused the Yen to quickly appreciate against many currencies. Current remarks from BoJ officials suggest that we are entering the next phase of this policy adjustment. A key event to watch will be the Japanese parliamentary vote on October 21, as its outcome could influence fiscal policy and collaboration with the central bank. Following that, the next BoJ meeting will be critical for a definitive rate decision. The market largely anticipates a rate hike, and if the BoJ acts, the Yen’s strength should increase. Create your live VT Markets account and start trading now.

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