EUR/JPY is trading near its year-to-date highs amidst tariff threats and political uncertainty in Japan. The Yen is under pressure, with renewed US tariff threats suggesting higher tariffs on imports from Japan and the EU from August 1.
President Trump remains open to talks with the EU, but negotiations with Japan appear stalled. This increases risk on Japanese assets and affects Yen demand negatively.
Political Uncertainty Impact
Political uncertainty is clouding Japan’s policy outlook as the July 20 national election approaches. Potential fiscal spending and continued monetary easing may limit the Bank of Japan’s scope to normalize interest rates.
EUR/JPY displays a bullish trend above the 20-day and 50-day SMAs, finding immediate support at the 78.6% Fibonacci retracement level, 170.93. A break above 173.08 could aim for the July 2024 high of 175.43.
However, the Relative Strength Index at 74 suggests overbought conditions. A pullback may occur before any further rise.
Key factors influencing the Yen include the Bank of Japan’s policies, Japanese and US bond yield differences, and broader risk sentiment. Despite the Yen being seen as a safe-haven, turbulent times may cause fluctuations in its value against other currencies.
Investment Strategies
Given the Yen’s continued pressure from external threats and domestic policy, we believe derivative traders should position for further EUR/JPY strength. Buying call options or entering bullish futures contracts allows traders to capitalize on the prevailing upward momentum. The fundamental environment outlined provides a strong basis for this trend to extend in the coming weeks.
The US administration’s renewed focus on tariffs specifically targeting Japanese imports presents a clear risk that should keep the Yen weak. We see this as a signal to maintain a bearish outlook on the Japanese currency. This justifies considering longer-dated options that could capture volatility around the early August deadline.
Political dynamics ahead of the national election favor policies that are negative for the currency. Japan’s core inflation, which came in at 2.5% in May 2024, is influenced by energy costs and does not yet signal a need for the central bank to aggressively tighten policy. This outlook for continued accommodative measures supports our bullish view on the euro cross.
From a technical standpoint, we view the support level near 170.93 as a potential entry point for new bullish positions. A trader could purchase call options with a strike price above the 173.08 resistance. This strategy positions for a move toward the July highs.
The overbought Relative Strength Index suggests a temporary pullback could occur before the next leg up. We would see this not as a reason to sell, but as an opportunity to structure a more favorable entry. Using a bull call spread could be an effective way to limit initial cost and define risk while betting on the uptrend to resume.
The large and persistent gap between US and Japanese government bond yields fundamentally undermines the Yen. As of late June 2024, the spread between the 10-year yields of the two countries remains over 320 basis points. This differential heavily incentivizes capital flows out of Japan, reinforcing the currency’s weakness.
