The Euro dropped against the Japanese Yen, hitting a two-week low of 175.20. This decline is due to the Yen’s strength, bolstered by strong statements from the Bank of Japan. Deputy Governor Shinichi Uchida noted that Japan’s economy is recovering, and the bank may tighten monetary policy if conditions are right. In Washington, Governor Kazuo Ueda confirmed that the BoJ would adjust monetary easing based on confidence in economic forecasts. This has led to increased market expectations for a possible rate hike, potentially in December, which differs from the approaches taken by other major central banks.

The Euro’s Temporary Support

In Europe, French Prime Minister Lecornu avoided two no-confidence votes, providing a brief boost to the Euro. Now, all eyes are on the Eurozone’s Harmonized Index of Consumer Prices, which is expected to show slightly faster inflation for September. The Bank of Japan aims for price stability with a 2% inflation target and has maintained ultra-loose monetary policy since 2013. This policy has included Quantitative and Qualitative Easing, negative interest rates, and control over bond yields. As a result, the Yen has weakened while other central banks raised rates to fight inflation. Higher global energy prices and a weaker Yen have pushed Japan’s inflation above the 2% target. Additionally, rising wages in Japan have contributed to this inflationary trend.

Opportunities for Yen Traders

With the EUR/JPY pair falling to 175.20, we see a clear sign of increasing Yen strength. This trend is driven by more hawkish comments from Bank of Japan officials, suggesting a change in monetary policy could be coming soon. Derivative traders should view this as a chance to position themselves for further JPY gains. The comments from Ueda and Uchida are supported by solid data. Japan’s most recent core CPI showed a rate of 2.9%, marking the 18th consecutive month above the BoJ’s 2% target. This ongoing inflation allows the central bank to consider another rate hike. This is fueled by the spring “Shunto” wage negotiations, which resulted in an average pay increase of over 4.5% for major firms. This sustained wage pressure is what the BoJ has been waiting for to gradually shift away from the ultra-loose policies that have weakened the Yen, especially during 2022-2023. The potential rate increase in March 2024 may just be the beginning of a longer tightening cycle. On the flip side, the Euro’s recent boost from French political news seems fragile. Today, attention turns to the final Eurozone HICP data. It’s widely expected to confirm the preliminary estimate of 2.8% for September. This contrasts with the European Central Bank, which has kept its main refinancing rate at 3.75% for the last four meetings. Market speculation has started to shift toward possible rate cuts in early 2026. Considering the growing policy differences, we should explore strategies that benefit from a lower EUR/JPY exchange rate. This includes buying EUR/JPY put options or, for a more cost-effective method, using bear put spreads. Another direct strategy is to short EUR/JPY futures contracts. Market consensus leans toward a BoJ rate hike occurring in December, not at the October meeting. Therefore, we should look at options expiring in December 2025 or January 2026 to capture the potential impact of this decision. Implied volatility on these contracts is likely to increase, making now a favorable time to enter these positions. Create your live VT Markets account and start trading now.

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