EUR/JPY slipped to near 185.00 in early European trade on Tuesday. The Japanese Yen strengthened after Prime Minister Sanae Takaichi won Japan’s snap election on Sunday.
The ruling Liberal Democratic Party won 316 of 465 seats in the lower house. It is the first time a single party has secured two-thirds of the chamber since World War II.
Fiscal Policy In Focus
Attention is turning to fiscal policy, including talks on cutting sales tax on food. There are questions over how spending plans, including defence, would be funded.
Japan’s government is due to submit its nominee as early as February 25. The nominee must be approved by both the lower and upper houses of the National Diet.
The Finance Minister said the government aims to pass next year’s budget and tax reform as quickly as possible. These steps may affect future currency moves.
On the daily chart, EUR/JPY is above the 100-day EMA at 180.62. RSI is 54, which is neutral, and Bollinger Bands show mild contraction.
Key Levels To Watch
Resistance is at 186.28, near the upper band. Support is at 184.37 near the middle band, then 182.46 at the lower band.
The EUR/JPY cross is settling near 185.00 after the yen’s brief surge following the LDP’s election win. With the Relative Strength Index (RSI) sitting at a neutral 54 and Bollinger Bands tightening, we are likely entering a period of consolidation. This suggests reduced price movement in the immediate future.
Given this expected calm, traders could consider strategies that profit from low volatility. One-month implied volatility for the pair has fallen to near 7.5%, making it attractive to sell options. A strategy like an iron condor, with strikes set outside the immediate support and resistance levels of 184.37 and 186.28, could be effective over the next couple of weeks.
However, the longer-term outlook suggests yen weakness due to the new government’s proposed fiscal policies. We saw a similar dynamic in 2025 when initial strength in the yen faded as markets began to price in the effects of increased government spending. This fundamental backdrop supports a bullish view on EUR/JPY for the months ahead.
This creates an opportunity to position for a future move up while volatility is low. We could look at buying longer-dated call options, perhaps for April or May expiry, which are currently cheaper due to the dip in implied volatility. This allows us to position for the expected upside while limiting our initial capital outlay.
A key date to watch is February 25th, when the government is set to submit its choice for a key nominee. This event will likely inject volatility back into the market, making it prudent to close any short-volatility positions before then. The uncertainty surrounding this nomination will cause options pricing to increase as the date approaches.
On the other side of the cross, recent inflation data from the Eurozone came in slightly above expectations at 2.3%, reinforcing the European Central Bank’s relatively steady stance. This policy divergence between a fiscally expansive Japan and a vigilant ECB adds further support to our underlying bullish thesis for the pair.
