The Euro’s decline from early highs against the Japanese Yen was halted at 176.65, with the currency pair rebounding to over 177.30. This upward movement upholds the broader bullish trend for the Euro.

The Yen’s previous gains have diminished as markets anticipate monetary policy announcements from the Federal Reserve, the Bank of Japan (BoJ), and the European Central Bank. The BoJ is anticipated to keep interest rates at 0.5%, with potential hikes expected in December or January, amidst increasing calls for immediate cuts.

European Central Bank Policy

The European Central Bank is expected to maintain its benchmark interest rate. The focus will be on whether the bank has reached the end of its easing cycle or if further reductions are possible.

Japan’s expansive monetary policy under Prime Minister Takaichi has been acknowledged, though the Bank of Japan’s independence is defended, adding pressure to normalise its policies.

The BoJ’s policy of Quantitative and Qualitative Easing since 2013 aimed to stimulate inflation. Significant policy divergence with other banks boosted the depreciation of the Yen until the BoJ began exiting ultra-loose policies in 2024, driven by increased inflation surpassing the 2% target.

Interest Rate and Market Reactions

With EUR/JPY holding above 177.00, the immediate focus is on the extreme short-term volatility expected around the Bank of Japan’s decision. Implied volatility for one-week JPY options has surged, making buying new directional positions like straddles expensive ahead of the announcement. We see this as a time for caution, not for placing large new bets before Governor Ueda speaks.

The market is pricing in a hold on interest rates at 0.5%, but we are looking closely at the forward guidance and the number of dissenters. Japan’s core inflation has remained sticky, hovering around 2.8% in the last quarter, giving hawks on the board more ammunition. An increase from one to three dissenters calling for a hike would be a strong signal for a year-end move and could trigger a sharp JPY rally.

The interest rate gap, with the ECB and Fed rates still significantly higher than Japan’s, continues to make shorting the yen attractive for carry trades. However, we have to remember the volatility back in late 2024, when similar expectations of a hike were dashed, causing a sharp JPY sell-off after an initial rally. This history suggests any dovish tone from Ueda will be aggressively punished by the market.

Given the high cost of options, we see more value in strategies like call spreads on pairs like EUR/JPY or USD/JPY to position for further yen weakness if the BoJ disappoints. This approach limits the upfront cost while capturing potential upside if the bullish trend remains intact. Conversely, traders anticipating a hawkish surprise could consider put spreads to cheapen their entry into a long-yen position.

We must not lose sight of the ECB’s decision, which follows the BoJ’s announcement. Any signal that the bank has finished its easing cycle, which began earlier this year, could provide an independent boost to the Euro. This creates a scenario where a dovish BoJ and a steady-to-hawkish ECB could push EUR/JPY significantly higher in the coming weeks.

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