Euro's strong trend arrives: Why has EUR/JPY become a trading hotspot?

If you follow the foreign exchange market, you must have heard of the concept of “interest rate differential trading.” It is precisely because of interest rate differential trading that the EUR/JPY cross has become a favorite among many investors. Compared to the traditional euro/dollar spot, EUR/JPY exhibits greater volatility and more opportunities.

Why are traders so enthusiastic about EUR/JPY?

EUR/JPY is one of the most traded currency pairs among yen crosses. On March 16, 2023, after the European Central Bank announced a 0.5% rate hike, a classic case occurred: the euro spot (EURUSD) rose by less than 0.13%, but EUR/JPY surged 1.1% within four hours, which is 8.5 times the move of the spot.

Where does this difference come from? The answer is interest rate differentials and Japan’s ultra-loose monetary policy. The Bank of Japan has maintained near-zero interest rates for a long time, while the European Central Bank is raising rates. This interest rate differential attracts a large influx of capital into EUR/JPY trading.

Overview of the euro and yen

Euro (EUR) is the official currency of the European Union, created in the financial markets in 1999 and physically circulated since 2002. Today, the euro has become the second-largest reserve currency globally, and the economic dynamics of the entire eurozone influence euro movements.

Yen (JPY) became widely used in international settlements after Japan became a member of the IMF. After decades of development, the yen has become synonymous with safe-haven currency. When global markets panic, capital often flows into the yen.

The common EUR/JPY quote refers to how many yen one euro can buy. It is influenced by both European and Japanese economic policies.

The twenty-year evolution of EUR/JPY

2002-2007: Euro Strengthening

The euro zone’s economy strengthened while Japan’s economy stagnated. Driven by policy divergence between the European Central Bank and the Bank of Japan, EUR/JPY rose from around 110 to nearly 170.

2008-2009: Financial Crisis Impact

The global financial tsunami erupted, risk assets were sold off, and the yen appreciated as a safe-haven currency. EUR/JPY plummeted sharply to around 112.

2010-2012: Eurozone Debt Crisis Shadow

The eurozone sovereign debt crisis broke out, putting pressure on the euro. Coupled with Japan’s ongoing economic stagnation, EUR/JPY fell to 94 in mid-2012, creating a recent low.

2012-2015: Revival Period

As the eurozone crisis eased, Japan launched large-scale monetary easing (Abenomics), leading to yen depreciation and euro appreciation. EUR/JPY reached a high near 149.

2015-2020: Central Bank Policy Adjustment Period

The European Central Bank implemented quantitative easing, weakening the euro. Meanwhile, global economic growth slowed, and EUR/JPY entered a correction phase.

2020-present: Post-COVID Complex Pattern

During the pandemic, central banks worldwide adopted easing policies, boosting risk assets, and increasing demand for yen interest rate differentials trading. After 2021, global inflation surged, the ECB entered a rate hike cycle, and the euro strengthened, with EUR/JPY trending upward overall.

Short-term and medium-long-term trading opportunities

Short-term opportunities: ECB hawkish stance boosts euro

Citi analysts pointed out that the ECB’s tightening pace is faster and more hawkish than the Fed. In the short term, the euro is expected to continue its upward trend, and EUR/JPY may retest the October 2022 high of 148.4.

On the technical side, daily charts show that when RSI exceeds 70 and then falls below 70, it can be a sell signal; when MACD shows a death cross, consider closing positions. Historically, these signals have significant profit potential.

Medium-long-term turning points: Risks from BOJ policy changes

The real turning point may come from the Bank of Japan. Currently, Japan faces inflationary pressures, and new BOJ Governor Ueda Kazuo may change years of ultra-loose policies. If the BOJ shifts toward tightening, it will trigger large-scale interest rate differential trades to close, and the yen could appreciate sharply, with EUR/JPY facing a decade-long decline.

Oil price fluctuations are also a risk factor. In early April, OPEC announced production cuts, pushing oil prices higher again, further fueling inflation and possibly accelerating the BOJ’s policy shift.

How to seize the trading opportunities in EUR/JPY

Step 1: Track economic data

Focus on eurozone CPI, GDP, and unemployment rates. When European data exceeds expectations, the euro tends to strengthen, benefiting EUR/JPY. Also monitor Japanese inflation data, as it directly impacts BOJ’s decision-making space.

Step 2: Pay close attention to central bank signals

ECB and BOJ rate decisions and governor speeches are market turning points. Hawkish signals will push the currency higher, dovish signals will suppress it.

Step 3: Use technical analysis tools

• Trend lines and channels: Identify support and resistance levels for EUR/JPY
• RSI indicator: Above 70 indicates overbought, potential sell point; below 30 indicates oversold, potential buy point
• MACD indicator: Golden cross signals buy; death cross signals sell
• Moving averages: Track medium-term trend direction

Practical tips

Short-term strategy: Watch for price touching the upper channel resistance on daily charts, combined with RSI falling below 70 or MACD death cross as sell signals. Use the RSI midline or channel midline as take-profit points, with the December 2022 high of 146.76 as a stop-loss reference.

Medium-long-term strategy: Continuously monitor Japanese inflation data and the new BOJ governor’s statements. Once the BOJ shifts from easing to tightening, shorting EUR/JPY will be a once-in-a-decade buying opportunity.

The investment story of EUR/JPY continues. The key is to grasp the market rhythm—listen to central bank speeches, watch data, and verify with technical indicators.