EUR/JPY declined by 0.50% on Tuesday, settling around 177.10, following a multi-year high of 178.23. This drop halted its five-day winning streak amid renewed interest in the Japanese Yen, which gained strength from an agreement between the US and Japan to enhance the supply chain of rare earths amid China’s recent export restrictions.

The Yen’s appeal has risen with the US-Japan agreement, deemed a “golden age” by Japan’s Prime Minister, during ongoing geopolitical tensions. Meanwhile, financial markets are focused on the Bank of Japan meeting, speculating on a potential rate increase as the Services Producer Price Index hit 3% YoY in September.

Eurozone Economic Challenges

The Euro faces challenges after Standard & Poor’s downgraded France’s credit rating due to political uncertainties. Additionally, the ECB survey indicated a slight fall in inflation expectations, suggesting the interest rate might hold at 2% during the ECB meeting. Observers will look to ECB President Christine Lagarde for any indication of the central bank’s strategy during Europe’s nascent economic recovery.

In currency exchanges, the Euro showed the most strength against the British Pound, with various percentage changes among major currencies recorded today. This data provides insights into the performance and sentiment in global currency markets.

Given the sharp rejection of EUR/JPY from its multi-year high, we see an opportunity for downside exposure. The recent drop back to the 177.10 level suggests momentum is shifting, creating a favorable entry point for short positions. Traders should consider buying EUR/JPY put options with expirations in the coming weeks to capitalize on a potential further decline.

Key Considerations for Traders

The case for a stronger yen is building ahead of the Bank of Japan meeting this Thursday. We’ve seen Japan’s core inflation remain stubbornly above the 2% target for 18 consecutive months, with the latest September 2025 data showing a 2.8% year-over-year increase. This sustained price pressure, combined with the recent services producer price acceleration, gives the BoJ a solid reason to signal another rate hike.

Meanwhile, the euro is weighed down by both political and economic headwinds. The unexpected S&P downgrade of France adds a layer of risk, and recent economic data confirms a sluggish recovery, as the flash Eurozone manufacturing PMI for October 2025 came in at a contractionary 48.5. With the European Central Bank expected to hold its rate at 2.0% this week, the policy divergence between a hawkish BoJ and a patient ECB is becoming more pronounced.

The new US-Japan mineral agreement also bolsters the yen’s traditional role as a safe-haven asset. Geopolitical tensions with China over strategic materials often lead to a flight to safety, and we saw a similar dynamic strengthen the yen during the tariff escalations back in the late 2010s. This political backdrop provides an additional, powerful tailwind for JPY strength against other major currencies.

Considering this fundamental divergence, we should be prepared for increased volatility around the central bank announcements this Thursday. Establishing bearish positions, such as buying puts or selling call spreads on EUR/JPY, could be a prudent strategy to profit from the growing pressure on this pair. The key is to position for a hawkish surprise from the BoJ against a backdrop of continued ECB caution.

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