The EUR/JPY cross climbs to around 178.00 in the early European session on Monday, with traders anticipating the German IFO Business Survey data. Concerns over Japan’s fiscal policy and the possibility of continued expansionary measures by Japan’s new Prime Minister weigh down the Japanese Yen against the Euro.

Reports indicate that Prime Minister Takaichi might introduce a stimulus package larger than the previous 13.9 trillion yen programme. Expectations of aggressive fiscal expansion and uncertainty surrounding the BoJ’s policy impact the JPY, driving EUR/JPY higher.

Ongoing BoJ Policies and Eurozone Politics

The BoJ is expected to keep its interest rate steady at 0.5% in Thursday’s meeting, with traders watching Governor Ueda’s guidance closely for any new cues. Meanwhile, political tensions in France may pose a risk to the Euro, with potential instability if the Socialist party imposes a no-confidence vote on Prime Minister Sébastien Lecornu.

Analysts predict the ECB will maintain interest rates at their upcoming meeting. José Luis Escrivá, an ECB Governing Council member, expressed satisfaction with the current level of borrowing costs.

The performance of the Japanese Yen relies on economic factors like the BoJ’s policy, US-Japan bond yield differentials, and global risk sentiment. The Yen, often viewed as a safe-haven, appreciates during turbulent periods, offering a protective investment option.

With the EUR/JPY cross pushing near 178.00, we see the market favoring the Euro due to the significant interest rate gap. The European Central Bank’s rate stands at 4.25%, while the Bank of Japan’s is only at 0.5%, making it profitable to hold Euros over Yen. This “carry trade” continues to be the main driver pushing the pair higher.

Strategic Considerations in the EUR/JPY Market

The weakness in the Japanese Yen is being fueled by expectations of a large government spending package from the new Prime Minister. We are also watching the Bank of Japan meeting this Thursday, but after the very slow pace of rate hikes since the policy shift in 2024, traders are not expecting any bold moves to strengthen the currency. This policy uncertainty keeps the pressure on the Yen.

On the other side, the European Central Bank is also expected to hold interest rates steady at its meeting this Thursday. With Eurozone inflation recently reported for September at a stubborn 2.8%, well above the 2% target, the ECB has little reason to consider cutting rates. This stable policy outlook provides underlying support for the Euro.

We should, however, remain aware of the political risks in France, where the government could face a no-confidence vote. For now, this seems contained, especially after today’s German IFO Business Survey came in at 89.5, slightly better than the 89.2 forecast, suggesting some resilience in the Eurozone’s largest economy. Looking back, the pair has rallied from near 165.00 over the past year, showing a very strong trend.

Given this backdrop, we believe buying call options on EUR/JPY is a viable strategy to capture further upside while managing risk. This allows traders to benefit from the ongoing trend driven by interest rate differentials. To protect against a surprise from the BoJ or a flare-up of political issues in France, using put options as a hedge could be a prudent move.

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