Market Expectations
Market expectations for a rate hike by the Bank of Japan (BoJ) provide some limit to the Yen’s decline. The currency’s status as a safe haven also plays a pivotal role during market stress periods.
EUR/JPY holds above the 20-day SMA and the 100-day EMA, continuing its upward trajectory. The pair is positioned just above the middle Bollinger Band, indicating reduced volatility and a consolidative trend. A closing above the upper band implies potential gains, while a dip below the mid-band could test the lower band and the 100-day EMA.
The BoJ’s historical ultra-loose monetary policy, diverging from other central banks, led to the Yen’s depreciation. Recently, as this policy is reversed, interest rate differentials are narrowing, offering Yen support.
The EUR/JPY cross is showing strength around the 180.90 mark, pushed higher by Japan’s weaker-than-expected GDP report for the third quarter. Technically, the pair remains in a broader uptrend, holding above key moving averages. This suggests that for now, the path of least resistance is to the upside, with an initial target near 182.02.
Bank Of Japan’s Influence
However, we believe the fundamental picture for the coming weeks is dominated by the Bank of Japan (BoJ). The market is increasingly betting on a rate hike at the December policy meeting, a view supported by recent wage growth data. This expectation is creating a significant headwind for EUR/JPY, even with the poor GDP numbers.
Looking back, we saw similar tensions throughout 2024 as the BoJ began unwinding its ultra-loose policy, causing sharp but temporary spikes in JPY strength. We believe the upcoming meeting is a major event risk that could trigger significant volatility. With Japan’s core inflation holding above the BoJ’s 2% target for 19 straight months, as confirmed by November’s 2.5% reading, the pressure to tighten policy is immense.
For derivative traders, this situation suggests a rise in implied volatility as we approach the BoJ’s meeting, which we expect around December 19th. We think strategies that profit from a large price swing, such as long straddles or strangles, could be effective. These positions would benefit from a significant move in either direction, whether the BoJ hikes rates or delivers a surprise dovish statement.
For those with a directional view that the BoJ will act hawkishly, buying put options on EUR/JPY offers a limited-risk way to position for a stronger Yen. A break below the initial support level of 178.98 following the meeting could trigger a sharper decline towards the 100-day EMA. The key is to manage risk ahead of a binary event like a central bank decision.
On the other side of the pair, the European Central Bank appears to be in a holding pattern, with recent comments suggesting no policy changes until at least the second quarter of 2026. This policy divergence places the focus squarely on the BoJ’s actions. Therefore, we see the primary driver for this cross in the coming weeks as Japanese monetary policy, not European economics.
