ECB Hawkishness And EUR/JPY Support
Given the current divergence in central bank policy, we see continued strength in the EUR/JPY cross, which is now trading around 186.50. The European Central Bank (ECB) is signaling a more hawkish stance, while the Bank of Japan (BoJ) remains cautious about raising rates further. This fundamental difference supports holding long positions in EUR/JPY. The latest Eurozone inflation data for May just showed an unexpected rise to 2.6% year-over-year, with core inflation also ticking up to 2.9%. These figures make it very difficult for the ECB to justify any interest rate cuts in the near future, providing a solid floor for the Euro. Derivative traders should consider buying call options on the Euro to capitalize on this expected strength.Yen Weakness And Risks Of Intervention
On the other side of the trade, the Japanese Yen’s weakness is a persistent theme. With Japan’s own core inflation hovering at a manageable 2.2%, the BoJ is not under the same pressure as the ECB to tighten policy aggressively. This widening interest rate differential will likely continue to weigh on the Yen. The primary risk to this trade is direct intervention from Japanese authorities to support their currency. We saw them intervene heavily in the spring of 2024 when the USD/JPY rate crossed the 160 level, so the threat is credible. To manage this risk, traders should consider using protective put options on EUR/JPY or setting tight stop-losses as the pair climbs higher.Start trading now — click here to create your real VT Markets account.
