EUR/JPY fell to about 184.20 in Asian trading on Monday, moving below 184.50. The Japanese Yen strengthened against the Euro as demand rose for safer currencies amid the Iran crisis.
US President Donald Trump said he will “avenge” the deaths of three US service members and that combat operations in Iran will continue. On Monday, Israeli strikes hit Beirut’s southern suburbs, while Hezbollah said it fired rockets and drones at Israel after the death of Iranian Supreme Leader Ali Khamenei.
Why The Yen Strengthened
The wider Middle East conflict has increased market unease, which supported the Yen and weighed on the currency pair. The move also followed comments from Japanese officials that pointed to firmer policy.
Bank of Japan Deputy Governor Ryozo Himino said policy is “somewhat accommodative” but that the BOJ should moderately raise rates if economic and price forecasts are met. In Europe, the ECB stayed cautious due to consumer “perceived inflation” and possible wage-driven pressure.
ECB President Christine Lagarde said efforts to curb inflation have been “effective” and said the bank is not committing to a set path for interest rates.
We recall how the flight to the Yen during the Iran crisis of 2025 pushed EUR/JPY below 184.50. While those immediate geopolitical tensions have eased, the underlying market focus has now shifted firmly to central bank policy divergence. This sets up a different trading environment for the coming weeks.
Central Bank Policy Divergence
The Bank of Japan followed through on its hawkish signals from last year, finally raising its policy rate to 0.25% in January 2026. With Japan’s core CPI holding firm above 2.1% year-over-year, the market is now pricing in at least one more hike before the end of the summer. This marks a significant unwinding of the long-standing carry trade that had previously weakened the Yen.
In contrast, the European Central Bank’s caution in 2025 has turned into a more dovish stance as we move through early 2026. The latest Eurozone composite PMI figures contracting to 48.5 suggest economic activity is slowing, increasing pressure on the ECB to consider rate cuts. This policy divergence with the BoJ is now the primary driver of the cross.
Given this clear divergence, we see value in positioning for further EUR/JPY downside over the next quarter. Traders should consider buying April or June put options with strike prices below 182.00. This provides a defined-risk way to capitalize on the expected weakness in the pair.
Implied volatility in the pair remains sensitive to any headlines from the Middle East, a lingering effect from last year’s conflict. We believe one-month volatility is currently underpriced, given the potential for sudden risk-off moves. Buying short-dated straddles could be a prudent hedge against a surprise flare-up in tensions.
