EUR/JPY is close to its highest level this year due to rising tariff threats and political uncertainty in Japan. The Yen is facing pressure as new US tariff threats hint at increased tariffs on imports from Japan and the EU starting August 1. President Trump is still open to discussions with the EU, but talks with Japan seem to be stuck. This situation increases risk for Japanese assets and reduces demand for the Yen.

Impact of Political Uncertainty

As the national election on July 20 approaches, political uncertainty is affecting Japan’s policy outlook. Possible fiscal spending and continued monetary easing could keep the Bank of Japan from raising interest rates. EUR/JPY shows a strong upward trend above the 20-day and 50-day simple moving averages (SMAs), with immediate support at the 78.6% Fibonacci retracement level of 170.93. If it breaks above 173.08, it could aim for the July 2024 high of 175.43. However, the Relative Strength Index (RSI) is at 74, indicating that the pair may be overbought. A pullback might happen before any further gains. Key factors affecting the Yen include the Bank of Japan’s policies, differences in bond yields between Japan and the US, and broader market sentiment. Although the Yen is considered a safe haven, market turbulence may cause its value to fluctuate against other currencies.

Investment Strategies

Due to ongoing pressure on the Yen from external threats and domestic policies, we recommend that derivative traders prepare for further strength in EUR/JPY. Buying call options or entering bullish futures contracts can help traders take advantage of the current upward trend. The fundamental backdrop suggests this trend could continue in the coming weeks. The US government’s renewed focus on tariffs targeting Japanese imports presents a clear risk, likely keeping the Yen weak. This suggests maintaining a bearish outlook on the Yen, indicating that traders might consider longer-dated options to capture volatility around the early August deadline. Political factors leading up to the national election are likely to favor policies unfavorable to the currency. Japan’s core inflation was 2.5% in May 2024, influenced by energy costs, and does not signal an urgent need for the central bank to tighten policy significantly. This environment supports our positive view on the euro cross. From a technical perspective, we see support near 170.93 as a potential entry point for bullish positions. A trader could buy call options with a strike price above the resistance at 173.08, positioning for a move towards July highs. The overbought RSI suggests that a temporary pullback may happen before the next rise. We believe this should be viewed as a chance to make a better entry rather than a reason to sell. Implementing a bull call spread can effectively reduce initial costs and manage risk while betting on the ongoing uptrend. The significant and persistent gap between US and Japanese government bond yields fundamentally weakens the Yen. As of late June 2024, the gap between the 10-year yields in the two countries is over 320 basis points, incentivizing capital to flow out of Japan, which reinforces the Yen’s weakness. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now