Insights 
VT 
The Euro fell against the Japanese Yen, reaching a two-week low due to expectations of the Bank of Japan’s further monetary tightening. In contrast, inflation in the Eurozone rose slightly, supporting a continued pause from the European Central Bank.
On Friday, the EUR/JPY decreased by 0.25%, trading around 175.40, having touched a low of 174.82 earlier. The Yen strengthened as Bank of Japan officials, including Deputy Governor Shinichi Uchida and Governor Kazuo Ueda, implied potential policy tightening.
BoJ Monetary Policy
BoJ commentary has bolstered market predictions of a rate hike by year-end, increasing the policy gap with other leading central banks. Politically, Japan faces potential instability with changes around Liberal Democratic Party leader Sanae Takaichi, which could impact fiscal direction but may stabilise the Yen.
Commerzbank and OCBC highlight the potential influence of political developments on Japan’s fiscal and monetary paths. Meanwhile, French Prime Minister Sébastien Lecornu survived no-confidence votes, temporarily soothing political stability worries in France.
Eurozone data showed the Harmonized Index of Consumer Prices rose 2.2% year-on-year in September, with core inflation at 2.4%. This supports ECB policymakers’ views that the bank nears the end of its rate-cutting phase. The monetary policy gap between Japan and the Eurozone benefits the Yen at the Euro’s expense.
Given the widening policy gap between a hawkish Bank of Japan and a paused European Central Bank, we see a clear path for further EUR/JPY weakness. The pair has already broken key short-term support, and the fundamental drivers for a stronger yen are solidifying. Traders should position for this trend to continue in the coming weeks.
One straightforward approach is to buy EUR/JPY put options with expirations in late November or December. This allows us to profit from a continued slide while defining our maximum risk to the premium paid. We could target strike prices below the recent low of 174.82, perhaps looking at the 174.00 or 173.50 levels.
Trading Strategy and Technical Signals
This view is strengthened by recent data showing Japan’s Q3 GDP growth unexpectedly accelerated to 0.5%, giving the BoJ a green light to tighten policy. Meanwhile, the ECB’s deposit facility rate has held steady at 2.50% for five consecutive months, with forward guidance suggesting no changes until at least Q2 2026. Interest rate futures now imply a nearly 80% probability that the BoJ will raise its overnight call rate to 0.25% before the end of the year.
From a technical standpoint, a sustained break below the 174.80 level would be a significant bearish signal. This could open the door to a much sharper decline towards the 172.00 area, a support level we haven’t tested since August 2025. We should use any small bounce in the pair as an opportunity to establish or add to bearish positions.
We saw a similar dynamic unfold in early 2024 when the BoJ finally abandoned its negative interest rate policy. That initial shift caused a rapid appreciation in the yen against most major currencies. The current commentary from BoJ officials suggests the second act of that policy normalization is now beginning.
The key catalyst to watch will be the Japanese parliamentary vote on October 21, as the outcome could affect fiscal policy and coordination with the central bank. Beyond that, all eyes will be on the next BoJ meeting for a definitive rate decision. The market is leaning heavily towards a hike, and if the BoJ delivers, the yen’s strength should accelerate.
