EUR/JPY extended a second day of gains, trading near 179.00 in European hours on Tuesday, as the yen came under pressure from rising global oil prices that lift import costs for Japan’s energy-dependent economy. The move comes even as the yen retains some support from expectations of tighter Bank of Japan policy, alongside the continued unwinding of carry trades and indications of domestic repatriation flows. In the euro area, the single currency drew support from hawkish European Central Bank pricing, with markets awaiting the ZEW surveys for Germany and the Eurozone later in the session.
After the ECB’s recent quarter-point increase, warnings from policymakers about upside inflation risks have kept further tightening in focus. LSEG pricing implies a 94% probability of another quarter-point rise in December, while Citi expects the tightening cycle could extend to March 2027. Separately, Commerzbank said it now expects a third hike in December, which it sees taking the deposit rate to 2.75%, and no longer forecasts rate cuts in 2027.
Trade Recommendations and Rationale
We suggest derivative traders look to build long positions on the EUR/JPY cross as it pushes toward the 179.00 level. This upward momentum is heavily supported by rising global energy costs, with Brent crude prices hovering near $80 a barrel and inflating Japan’s import bill. Since Japan imports over 90% of its energy needs, this expanding trade deficit continues to weaken the Yen in the short term.
We recommend utilizing call options on the Euro to capitalize on the widening interest rate differential. Market pricing currently shows a massive 94% probability of a quarter-point ECB rate hike in December, aiming for a 2.75% deposit rate. Major institutions like Citi are even projecting this tightening cycle to extend well into 2027, making Euro-backed derivatives highly attractive.
Risk Management and Data-Driven Strategies
However, we must advise setting tight stop-losses on long EUR/JPY positions due to looming Bank of Japan intervention risks. Historically, the rapid unwinding of JPY carry trades has triggered volatile drops of 500 to 1,000 pips in very short periods. If domestic Japanese investors accelerate the repatriation of their massive foreign assets, we could see sudden, aggressive pullbacks in this cross.
To fine-tune entry points over the coming weeks, we should closely monitor the upcoming German and Eurozone ZEW Economic Sentiment data. Historical trends show that positive surprises in Eurozone sentiment indicators often spark immediate 50-to-80 pip rallies in EUR pairs. Positioning ahead of these data releases with short-term knock-out options can help manage downside risk while capturing quick upside gains.
