EUR/JPY ended a four-day rise and traded near 184.20 during European hours on Thursday. The pair stayed lower as the Yen gained support from rising expectations of a near-term Bank of Japan rate rise, linked to an oil-driven inflation shock tied to the Middle East conflict. The BoJ kept policy steady in March, and Governor Kazuo Ueda signalled a possible move in April. Japan’s 10-year government bond yield rose to 2.27% on Thursday, ending a two-day fall, while 2-year yields hit three-decade highs and 5-year yields reached record levels.

Bank Of Japan Tightening Signals

BoJ January meeting minutes showed policymakers saw further rate rises as appropriate if economic and inflation forecasts are met, as real rates remain deeply negative. Members also favoured deciding at each meeting rather than setting a fixed tightening path. The Euro may find support from hopes of reduced tensions in the Middle East. The White House said talks are continuing, with the Trump administration sending a 15-point proposal to Iran via Pakistan, while Iran is expected to reject a US ceasefire offer and put forward a five-point plan that includes sovereign control over the Strait of Hormuz. ECB President Christine Lagarde said the bank is assessing the conflict’s economic impact. She said the ECB is ready to adjust policy at any meeting if energy-led inflation risks spread. The recent halt in the EUR/JPY rally near 184.20 signals a shift we need to watch closely. The market is clearly pricing in a more aggressive Bank of Japan, with an April rate hike now looking highly probable. This growing conviction is giving the Yen a significant boost against the Euro.

Strategy Focus On Volatility

This view is supported by the latest Tokyo Core CPI data for March, which came in at a surprising 3.1%, well above the central bank’s target. We’re also seeing reports that the final ‘Shunto’ spring wage negotiations resulted in an average pay increase of over 5.5%, a multi-decade high that gives the BoJ cover to act. This is a much stronger inflationary picture than what we were dealing with for most of 2025. Given this backdrop, we should anticipate a spike in volatility for EUR/JPY over the next few weeks leading into the BoJ meeting. Traders could consider buying options straddles to profit from a large price swing, regardless of whether the BoJ delivers on hawkish expectations or disappoints the market. The key is to position for movement itself, not just direction. However, we cannot ignore the potential for a Euro recovery driven by headlines from the Middle East. Any credible signs of de-escalation following the reported US proposal to Iran could quickly unwind the Yen’s strength. This creates a two-sided risk that makes outright short positions on the cross dangerous. The Euro’s side of the equation is also complicated by our own inflation, with the flash Harmonised Index of Consumer Prices for March showing core inflation remaining sticky at 2.9%. This persistence keeps pressure on the European Central Bank, limiting the policy divergence that has favored the Euro for so long. President Lagarde’s recent comments confirm the ECB is ready to respond to these energy-driven price risks. Therefore, we see the primary trade as being long volatility rather than taking a strong directional bet on the cross. We should also monitor the spread between Japanese and German bond yields, as any narrowing will signal a fundamental shift in favor of the Yen. Using options to define risk or trading relative value between the two economies appears to be the most prudent approach. Create your live VT Markets account and start trading now.

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