The Euro (EUR) is trading slightly lower against the Japanese Yen (JPY) on Wednesday, breaking a three-day winning streak. The Japanese Yen gains strength amid stronger domestic demand and cautious trading ahead of Japan’s Upper House election on 20 July.
EUR/JPY is retreating from a fresh yearly high of 173.25 and now trades near 172.00. This pullback is due to profit-taking and a stable Yen weighing on the cross.
Japanese Bond Yield Spike
Japan’s 10-year government bond yield increased toward 1.6% on Wednesday, marking its peak since 2008. Expectations for expanded fiscal spending, as the election approaches, suggest potential stimulus measures like a cut in the consumption tax.
Comments from ECB official Joachim Nagel did not bolster the Euro. Nagel advocated for stability amid trade tensions and inflation risks, foreshadowing unchanged rates at the ECB’s next meeting.
Key economic data due this week includes Eurozone inflation and Japan’s CPI release. These reports could affect the EUR/JPY pair’s trajectory.
The Core Harmonized Index of Consumer Prices (HICP) will next be released on Thursday, 17 July 2025. This index, pivotal for measuring inflation trends within the European Monetary Union, is published monthly by Eurostat.
Given the pullback from the yearly high, we see this as a potential turning point rather than just simple profit-taking. The strengthening of the Japanese currency seems to be driven by fundamental shifts. Derivative traders should view the 173.25 level as a significant resistance point for the near future.
Yen Momentum
We believe the Yen’s strength is gathering momentum. Japan’s core inflation for May accelerated to 2.5%, surprising expectations and adding pressure on the Bank of Japan to normalize policy. The rise in Japanese government bond yields to a peak not seen since 2008 further supports this view of a hawkish shift.
The Euro, in contrast, appears to be facing headwinds. The recent comments from the European Central Bank official advocating for stability align with May’s core inflation data, which rose only slightly to 2.9%. This suggests there is little urgency for the ECB to adopt a more aggressive policy, limiting the Euro’s upside potential against other currencies.
Historically, the wide interest rate differential has fueled a massive carry trade, borrowing Yen to buy Euros, which pushed this pair to its recent highs. The current dynamics, however, suggest this popular trade is becoming precarious. An unwinding of these positions could lead to a sharp and rapid decline in the EUR/JPY.
Therefore, we feel the prudent response is to position for a potential downside move in the coming weeks. Purchasing put options on the EUR/JPY offers a clear strategy to capitalize on a decline while defining risk. This allows traders to protect against a drop below the current 172.00 support level.
All eyes should now be on the upcoming economic data, specifically the next Japanese CPI report and the Eurozone flash HICP inflation estimate due on July 2nd. These figures will be critical catalysts and will likely determine whether the pair breaks lower or attempts to retest its peak. We will be watching these releases to confirm our bearish bias.
