Insights 
VT 
The Euro gains ground against the Japanese Yen, trading near 173.00 after hitting its lowest since September 9. This occurs amidst political uncertainty in Japan, where the ruling Liberal Democratic Party is set to choose a new leader.
Japan’s August unemployment rate increased to 2.6%, above the 2.4% forecast, suggesting a cooling labour market. Despite this, Eurozone data remains unimpressive, with the HCOB Composite PMI rising slightly to 51.2 in September, and the Services PMI below expectations at 51.3.
Euro Struggles Amidst Economic Factors
The Producer Price Index (PPI) for August fell 0.3% month-on-month, against a predicted 0.1% decline, while yearly PPI dropped by 0.6% compared to a 0.4% forecast decrease. These factors contributed to the Euro’s struggle to capitalise on the Yen’s broader vulnerabilities.
Bank of Japan Governor Kazuo Ueda signalled potential future rate hikes, depending on the economic outlook. Global uncertainties, such as US labour trends, could delay policy changes. The Bank of Japan recently moved away from its ultra-loose monetary policy due to rising energy prices and inflation surpassing its 2% target, partly reversing the Yen depreciation trend.
Given the current situation, we see the Japanese Yen under pressure from both political uncertainty with the LDP leadership contest and a softer labor market, with unemployment ticking up to 2.6%. This has allowed EUR/JPY to find support and rebound towards the 173.00 level. However, the Euro’s own weakness, highlighted by falling producer prices, is capping any significant upside for now.
Core Tension For Traders
The core tension for traders lies in the policy divergence between the Bank of Japan (BoJ) and other central banks. While BoJ Governor Ueda sounds hawkish, we’ve seen Japan’s core inflation hover persistently above 2% for much of the last year, giving them cause to act, yet they remain cautious. This contrasts with the Eurozone, where we saw the Harmonised Index of Consumer Prices (HICP) show a clearer disinflationary trend through late 2024 and into 2025.
This uncertainty suggests that volatility in EUR/JPY could increase sharply in the coming weeks. We believe derivative traders should prepare for a potential breakout from the current range rather than a continued slow grind. Historically, as seen throughout 2024, a surprise policy shift or even strong guidance from the BoJ has caused significant moves in Yen pairs.
Considering this, purchasing options strategies that benefit from a large price swing, regardless of direction, could be a wise approach. A long straddle or strangle on EUR/JPY would allow traders to capitalize on a decisive move once the political dust settles in Japan or the BoJ finally clarifies its next steps. This strategy limits risk while providing exposure to the potential for a significant re-pricing of the currency pair.
