EUR/JPY slipped after two days of gains and traded near 181.40 in Asian hours on Tuesday, moving below 181.50. Markets are awaiting Germany’s January HICP and February ZEW Survey data due later in the day.
The move lower followed firmer demand for the Japanese Yen on expectations the Bank of Japan could raise rates sooner than previously assumed. Former BoJ board member Seiji Adachi said a rate rise in April is likely once more data is available, and Governor Kazuo Ueda said a regular meeting with Prime Minister Sanae Takaichi included no specific policy requests.
Japan Growth Data And Yen Dynamics
The Yen had faced some pressure after Japan’s GDP rose 0.1% quarter-on-quarter in Q4, after a 0.7% fall in Q3. The result missed a 0.4% forecast, while annualised GDP rose 0.2% versus a 1.6% forecast, after a 2.6% fall in Q3 (revised from a 2.3% fall).
The euro found support after the ECB said it will widen access to its euro liquidity backstop for central banks globally. ECB President Christine Lagarde said the inflation outlook is in a “good place”, and the euro was also supported by reports that Bank of France Governor François Villeroy de Galhau will step down in June.
Looking back to early 2025, we saw the EUR/JPY cross dip as we anticipated a potential Bank of Japan rate hike. That speculation was paired with concerns over weak Japanese GDP data, creating significant uncertainty. The Euro, meanwhile, was finding its own support from a hawkish European Central Bank.
The Bank of Japan did follow through on that speculation, ending its negative interest rate policy in July 2025 with a hike to 0.0% and following up with another small hike to 0.10% in December. Despite this, the ECB held its own deposit facility rate firm at 4.00% throughout 2025 to combat persistent inflation. This has kept the interest rate difference between the two currencies quite wide.
Trading Implications For Policy Divergence
As of today, the EUR/JPY is trading around 185.20, significantly higher than the 181.50 level we saw a year ago. Japan’s most recent national core CPI data for January 2026 came in at 2.0%, right on the BoJ’s target, suggesting they may be cautious about further aggressive hikes. This reality has kept the Yen from appreciating substantially against the high-yielding Euro.
The focus for derivative traders now should be on this policy divergence. The carry trade, being long EUR and short JPY, remains profitable due to the nearly 4% interest rate differential. Using forward contracts to lock in the current exchange rate for future payments can help manage risk while still collecting the positive carry.
Given the opposing directions of monetary policy, volatility is a key factor to consider. One-month implied volatility for EUR/JPY is currently hovering around 8.2%, which is elevated but not extreme. Traders could consider selling out-of-the-money options, like puts, to collect premium, betting that the powerful carry trade will prevent any sharp, sudden drops in the pair.
We must watch upcoming central bank meetings for any change in tone, especially from the ECB. Any signal that the ECB is preparing to cut rates sooner than expected could unwind the carry trade quickly. Conversely, if Japanese wage growth data for the spring negotiations comes in strong, it could signal more BoJ hikes and put pressure on this pair.
