The euro edged 0.15% higher to around 185.00 against the yen in Monday\u2019s European session, lifting EUR\/JPY as markets price in the chance of a near-term European Central Bank rate rise aimed at keeping Eurozone inflation aligned with its 2% target. Recent ECB commentary has focused on renewed inflation pressure and the need for a prompt policy response to contain price growth.<\/p>\n
Policy attention has also turned to energy risks after ECB Governing Council member Yannis Stournaras warned that a closure of the Strait of Hormuz, through which almost 20% of global energy supply passes, could feed through into wages and the prices of goods and services, complicating the inflation path back to 2% over the medium term. Separately, Bloomberg reported that Austrian central bank head Martin Kocher said following a May 22\u201323 meeting in Cyprus that the ECB is on track for a rate increase next month unless a durable US\u2013Iran peace arrangement emerges, while the yen eased ahead of Bank of Japan Governor Kazuo Ueda\u2019s speech on Wednesday and May Tokyo CPI data due on Friday.<\/p>\n
Given the European Central Bank’s increasingly firm stance on inflation, we see a clear divergence in monetary policy emerging against the Bank of Japan. Recent Eurozone flash HICP data for May showed inflation ticking up to 2.3%, slightly above expectations and reinforcing the ECB’s hawkish bias. This suggests the path of least resistance for the EUR\/JPY is upwards in the near term.<\/p>\n
The ongoing tensions around the Strait of Hormuz continue to support this view, keeping energy prices elevated with Brent crude currently holding firm near $95 a barrel. Market expectations, reflected in overnight index swaps, are now pricing in a greater than 90% probability of a 25-basis-point ECB rate hike in June. We believe this makes long-Euro positions attractive against currencies with more passive central banks.<\/p>\n
In contrast, the Japanese yen is likely to remain under pressure. The most recent Tokyo CPI data, a key indicator for nationwide trends, came in below the Bank of Japan\u2019s 2% target, giving officials no reason to consider tightening policy. This policy gap between an active ECB and a stationary BoJ is the central theme driving our strategy.<\/p>\n
For derivative traders, this environment favors strategies that profit from a rise in EUR\/JPY. We are looking at buying EUR\/JPY call options with expirations in late June or July to capture the expected move following the ECB’s next meeting. One-month implied volatility in the pair has already climbed to over 12%, indicating the market is anticipating a significant price swing.<\/p>\n
To manage the higher cost of these options due to rising volatility, we also see value in constructing bull call spreads. By buying a call option and simultaneously selling another call at a higher strike price, traders can reduce the initial premium paid. This strategy caps the potential upside but offers a more cost-effective way to position for a moderate, controlled rally in the currency pair.<\/p>\n","protected":false},"excerpt":{"rendered":"
EUR\/JPY rose as markets priced a June ECB hike, while BoJ stays dovish and energy risks linger.<\/p>\n","protected":false},"author":103,"featured_media":17044,"comment_status":"","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[59],"tags":[99,103,86,56,45],"class_list":["post-53924","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-live-updates","tag-central-bank","tag-derivatives","tag-eur","tag-euro","tag-yen"],"acf":{"acf_article_selection_author":null},"aioseo_notices":[],"_links":{"self":[{"href":"https:\/\/www.vtmarkets.com\/en-ca\/wp-json\/wp\/v2\/posts\/53924","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.vtmarkets.com\/en-ca\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.vtmarkets.com\/en-ca\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.vtmarkets.com\/en-ca\/wp-json\/wp\/v2\/users\/103"}],"replies":[{"embeddable":true,"href":"https:\/\/www.vtmarkets.com\/en-ca\/wp-json\/wp\/v2\/comments?post=53924"}],"version-history":[{"count":0,"href":"https:\/\/www.vtmarkets.com\/en-ca\/wp-json\/wp\/v2\/posts\/53924\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.vtmarkets.com\/en-ca\/wp-json\/wp\/v2\/media\/17044"}],"wp:attachment":[{"href":"https:\/\/www.vtmarkets.com\/en-ca\/wp-json\/wp\/v2\/media?parent=53924"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.vtmarkets.com\/en-ca\/wp-json\/wp\/v2\/categories?post=53924"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.vtmarkets.com\/en-ca\/wp-json\/wp\/v2\/tags?post=53924"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}