Euro/Japanese Yen Exchange Rate Trend | Why Is This Cross Currency Pair Worth Watching?

In the vast world of the forex market, besides mainstream spot trading, cross currency pairs often offer unexpected opportunities. The EUR/JPY pair, as one of the most liquid cross currencies globally, tends to exhibit more volatile price movements than the direct EUR/USD pair. Especially in recent years, the EUR/JPY has experienced frequent unexpected swings, attracting considerable investor attention. So, what makes this cross pair particularly special? How will its future trend develop? This article will explore in depth.

Why choose to trade EUR/JPY?

EUR/JPY (Euro/Japanese Yen) is one of the most actively traded cross pairs, with volatility often far exceeding that of the spot EUR/USD.

A typical example is the European Central Bank’s policy shift in March 2023. When the ECB announced a 0.5% rate hike, the market reacted sharply. Although the US dollar interest rates remained relatively high at the same time, the spot EUR/USD did not rise significantly, but EUR/JPY surged 1.1% within four hours of the announcement — eight and a half times the move of the spot EUR/USD, clearly demonstrating the trading value of cross pairs.

Interest rate differential trading is a key driver of EUR/JPY movements. Since the Bank of Japan has maintained near-zero interest rates for a long time, while the European Central Bank has gradually tightened its policy, the widening interest rate gap has attracted continuous capital inflows into Euro buying and Yen selling.

Additionally, EUR/JPY has strong correlations with other currency pairs. It tends to move in tandem with EUR/USD, USD/JPY, and other related pairs, providing opportunities for hedging and arbitrage strategies. At the same time, economic data, central bank policies, and geopolitical events from Europe and Japan can have substantial impacts on the exchange rate.

EUR/JPY: A twenty-year market evolution

Since the euro banknotes began circulation in 2002, this cross pair has experienced several distinct phases of change.

2002-2007: Appreciation phase — The Eurozone economy performed strongly, while Japan’s economy remained sluggish. Coupled with the European Central Bank adopting a more hawkish stance compared to the Bank of Japan, the euro appreciated significantly against the yen, reaching nearly 170 in early 2007.

Then, 2008-2009 financial crisis disrupted this trend. Global risk assets were sold off, and risk-averse capital flooded into the yen, causing EUR/JPY to fall to around 112.

2010-2012 Eurozone debt crisis saw increasing concerns over the euro area. The spread of sovereign debt issues pressured the euro, pushing the exchange rate down to about 94.

However, post-mid-2012, the situation reversed. The eurozone economy gradually stabilized, and Japan’s “Abenomics” introduced massive easing policies that depreciated the yen, leading EUR/JPY into a long-term upward channel, with highs reaching around 149.

2015-2020: Volatility period — The ECB deepened quantitative easing, lowering interest rates and exerting downward pressure on the euro. During 2020, amid global monetary easing due to the pandemic, the euro and yen experienced fluctuations. As inflation rose in 2021, Europe entered a rate hike cycle first, while the Bank of Japan maintained ultra-loose policies, causing EUR/JPY to oscillate higher again.

Key factors influencing exchange rate trends

Economic fundamentals determine the relative strength of currencies. GDP growth, declining unemployment, or higher-than-expected inflation in the Eurozone tend to lift the euro. Conversely, weak economic data from Japan can hinder yen appreciation.

Central bank policies are the most direct influences. The divergence between the ECB’s tightening and the BOJ’s easing continues to push EUR/JPY higher. Any policy shifts on either side can trigger significant volatility.

Global risk sentiment also plays a crucial role. When market sentiment is optimistic, carry trades and interest differential strategies tend to build up. Conversely, during risk aversion, the yen, as a safe-haven currency, gains buying interest, impacting EUR/JPY downward.

Geopolitical and supply shocks (such as surging energy prices) can lead to re-pricing of the exchange rate.

Technical trading tips

From a technical perspective, indicators like RSI and MACD offer concrete trading signals.

When the weekly RSI of EUR/JPY crosses above 70 into overbought territory and then falls back below 70, it may be prudent to reduce long positions. Historically, such signals often lead to a correction of 20-40 points.

MACD’s golden cross and death cross also provide reference points. The cycle from a golden cross (buy signal) to a death cross (sell signal) often captures gains of 5-10 points.

The key is to combine technical signals with fundamental analysis. Relying solely on indicators can be risky during sudden policy changes.

Two key variables for future trend

In the short term, the market consensus is that the ECB remains more hawkish than the BOJ. During the banking crisis, the ECB even raised rates by 0.5%, demonstrating a firm stance that supports a strong euro. From a technical standpoint, EUR/JPY is likely to maintain a bullish bias in the near term, with potential tests of last October’s high near 148.4.

However, a critical medium- to long-term variable is: Will the BOJ change its ultra-loose policy?

As inflation in Japan remains high, the new BOJ Governor Ueda Kazuo faces significant pressure. If the BOJ decides to shift policy or even exit negative interest rates and ultra-loose frameworks, the interest rate differential trade could unwind massively, with large yen buying pushing JPY value several times higher. This would fundamentally impact EUR/JPY, potentially triggering a decade-long decline.

Therefore, monitoring Japanese CPI data and statements from the new BOJ governor is crucial for assessing mid-term turning points.

How investors can seize trading opportunities

Pay attention to economic data release dates. Indicators like CPI, GDP, and unemployment from the Eurozone and Japan often trigger short-term reversals. Anticipating these timings helps in planning positions.

Follow central bank policy directions. ECB and BOJ meetings and officials’ speeches are key. Policy shifts often show early signals weeks in advance, with markets reacting accordingly.

Combine technical patterns and indicators. Observe whether RSI on daily charts repeatedly enters overbought zones, whether MACD forms new golden crosses, and whether channels and trendlines are effectively broken — all serve as practical references.

Construct scenario analyses. In the short term, the euro is more likely to be strong; in the medium term, watch for BOJ policy windows; in the long term, be alert to structural declines caused by policy shifts.

Overall, trading opportunities in EUR/JPY stem from both fundamental advantages driven by policy divergence and the structural capital flows of interest rate differentials. However, no cross pair should be viewed as a one-sided trend; risk management and dynamic adjustment are equally critical.