Insights 
VT 
EUR/JPY held steady around 169.50 during Asian trading on Thursday. The Japanese Yen may face hurdles as the Bank of Japan hesitates to raise interest rates due to economic risks.
Governor Kazuo Ueda of the BoJ stated that future rate hikes will depend on data such as wage growth. Despite headline inflation staying above 2% for three years, underlying inflation is below the target.
The Yen and Tariff Concerns
The Yen struggled following Donald Trump’s contemplation of higher tariffs on Japan. He expressed doubt about reaching a trade deal with Japan.
The European Central Bank forum drew attention for insights into the bank’s policy direction for the year. ECB officials expressed worry about the Euro’s strength and its impact on inflation.
Pierre Wunsch of the ECB stated he is comfortable with market interest rate expectations and supports a mild policy stance. Olli Rehn suggested that European defence funding could strengthen the Euro by creating a new safe asset.
The EUR/JPY remained relatively stable during Thursday’s early hours, hovering close to the 169.50 level. In effect, markets appear to be in a holding pattern, particularly as the Bank of Japan weighs its next move cautiously. Governor Ueda was clear in his remarks that future monetary tightening will be contingent on wage developments. It’s worth noting that while headline consumer price inflation has floated above 2% for a prolonged stretch, core figures — the type usually examined to discern persistent inflation pressure — have not met the same threshold. This divergence makes it harder for policymakers to justify immediate tightening without risking premature disruption to a fragile recovery.
What may be unsettling for markets beyond central bank positioning is a re-emergence of geopolitical trade concerns. Trump’s musings about imposing more duties on Japanese goods, paired with dismissive comments about future trade deals, unsettled sentiment around the Yen. The combination of trade tension risk and unsteady domestic inflation pressures could act as a weight against any sharp Yen recoveries, especially if the BoJ continues to refrain from firmer action.
Meanwhile, the European Central Bank continues to leave the door ajar for policy moderation but has now added a degree of nuance to its assessment. Wunsch has flagged comfort with market-implied rates, suggesting that current pricing aligns well with internal expectations. That line of thinking, taken at face value, implies no disagreement with where short-term interest rates stand. At the same time, Rehn floated the prospect of increased European defence spending backing the Euro, arguing that safe EU-issued debt could create a magnet for investors.
Focus on Policy and Economic Signals
For those trading on policy spreads or volatility, the climate now leans more heavily on interpreting rate differentials in light of political discourse, not purely macroeconomic data. Divergences in sentiment between policy-makers like Wunsch and Rehn suggest that consensus within the ECB may not yet be fully formed. That provides room for ongoing repositioning, particularly as inflation prints and wage updates feed through in real time.
We are now facing a juncture where commitment to policy continuity may fade quickly under political or financial stress. If Eurozone safe asset discussions advance, markets may begin internalising tighter financial conditions ahead of any formal decision from the ECB. That could feed through to EUR/JPY positions. Speculative positions may find it attractive to lean into Euro strength after ECB tones turned slightly more constructive, though this view would need re-evaluation should pricing for military budgets or fiscal integration underdeliver.
There’s also the timing to keep in mind. Japanese data over the next few weeks could reaffirm the BoJ’s patient stance, particularly if wage data remains tepid. No high-impact tightening seems likely until we see decisive changes in underlying economic drivers. As such, forward guidance and third-party comments will carry outsized influence. With any unexpected commentary from Tokyo liable to trigger volatility, it may prove productive to lower exposure near policy meetings or media appearances from Ueda or finance ministry officials.
From our view, it’s clear that both currency blocs are reflecting broader uncertainties. Euro appreciation, even if grounded in strong fiscal themes, might eventually place more stress on ECB assumptions. If stronger capital inflows push the Euro higher and inflation begins to drift lower, speculative pricing might need to adjust again, even before any shift in tone from Frankfurt.
Against this context, we should remain attentive to shifts in bond market direction, particularly in German yields, as they could act as early signals for renewed ECB recalibration. Similarly, abrupt moves in Japanese debt markets — which remain relatively suppressed — might offer clues into BoJ discomfort or external pressures mounting for faster normalisation.
Risk-reward profiles are beginning to favour asymmetric outcomes. Watching volatility pricing into the next quarter may be more fruitful than outright directional bets. Sudden recalibrations remain in play if either side of the cross surprises with policy or fiscal headlines.
