Insights 
VT 
The EUR/JPY cross fell to around 177.60 during Asian trading, ending a five-day rise. The Japanese Yen gained strength after US President Donald Trump and Japan’s Prime Minister Sanae Takaichi signed an agreement to secure the supply of critical minerals and rare earths.
This agreement follows China’s recent tightening of export controls on these materials. Takaichi looks to strengthen US-Japan relations, providing support for the JPY and affecting the EUR/JPY cross. Trump will meet China’s President Xi Jinping in South Korea to discuss trade issues.
Political Changes in France
In Europe, the potential political changes in France are drawing attention. France’s Socialist Party may challenge Prime Minister Sebastien Lecornu’s government if next year’s fiscal plans lack tax increases on the wealthy. Standard & Poor’s Global downgraded France’s rating, worrying markets about political and financial stability.
The European Central Bank is expected to maintain borrowing costs at 2.0%, with inflation under control and the Eurozone economy improving. ECB President Christine Lagarde’s press conference will be closely watched for future guidance. Meanwhile, the Bank of Japan’s interest rate decision is expected on Thursday, which markets will also scrutinise.
We are seeing the EUR/JPY cross pull back towards 177.50, breaking a significant winning streak. The Yen is gaining strength from the new US-Japan agreement to secure rare earths, a strategic response to the export controls China initiated back in 2023. This deal is being viewed as a long-term positive for Japan’s economic security, boosting the appeal of the Yen.
Bank of Japan Meeting
The upcoming Bank of Japan meeting on Thursday is now the key event to watch. Looking back at the BoJ’s historic decision to end its negative interest rate policy in March 2024, we know the market is sensitive to any hawkish signals. With one-month risk reversals on USD/JPY showing a slight bias for JPY calls, traders are positioning for potential Yen strength, making short EUR/JPY positions or buying puts on the cross an attractive strategy.
On the other side, the Euro is facing pressure from political instability in France. This isn’t surprising, as we’ve watched France’s debt-to-GDP ratio remain stubbornly high, finishing 2024 at around 110% according to INSEE. The surprise S&P downgrade simply confirms that markets are losing patience with political risks that threaten fiscal repair.
The European Central Bank is expected to hold its interest rate at 2.0% this week, which seems appropriate. Recent Eurostat data has shown headline inflation in the Eurozone hovering near the 2% target for the last quarter, reducing the need for any immediate policy change. For us, this means the primary driver for EUR/JPY movement will likely come from the Japanese side and broader market sentiment, not from the ECB.
