Euro Trend Analysis: Why Are Smart Investors Watching EUR/JPY?

Hidden Goldmine in Forex Crosses

Many people only know how to trade direct pairs like EUR/USD or USD/JPY, but they overlook the fact that the cross pair EUR/JPY hides even greater opportunities. As two of the world’s major economic pillars, Europe and Japan have vastly different monetary policies, which is exactly where traders can exploit arbitrage.

Especially since the euro’s trend is relatively independent of the dollar, the EUR/JPY pair exhibits volatility far exceeding that of direct pairs during certain periods. For example, in March 2023, when the European Central Bank announced a rate hike, EUR/USD only rose by 0.13% that day, but EUR/JPY surged by 1.1%—eight times the former. This is why professional traders are paying close attention to this underestimated trading instrument.

The Origins and Status of the Two Major Currencies

The story of the euro began in 1999, when 11 EU countries decided to abandon their respective currencies and adopt this super currency. After physical euro notes and coins circulated in 2002, it quickly became the world’s second-largest reserve currency, second only to the US dollar. Today, whether in international trade or central bank reserves, the euro’s influence is significant.

The rise of the yen is even more dramatic. In the 1960s, Japan was just a minor player with capital controls. But as Japan’s economy soared to become the second-largest in the world, the yen also stepped onto the international stage. After the bubble burst in the 1990s, the Bank of Japan implemented zero interest rate policies, and the yen became a darling of arbitrage trading—investors borrowed大量借入日元投資高收益資產，這也是為什麼日元被稱為「避險貨幣」的原因。

Simply put, EUR/JPY measures: How many yen can one euro buy. Changes in this ratio reflect the relative strength of the two economies.

Why Are Cross Pairs More Profitable Than Direct Pairs?

The key lies in interest rate differential trading. The European Central Bank continues to hike rates, while the Bank of Japan maintains an ultra-loose policy. This means borrowing yen to invest in European assets allows investors to profit from interest rate spreads. The larger the spread, the stronger the upward push on EUR/JPY.

Moreover, the euro’s movement is driven by three dimensions: ECB policy, Eurozone economic data, and the relative strength compared to Japan. These three factors often resonate on the cross pair, amplifying volatility. In contrast, EUR/USD, as a direct pair, involves only two dimensions, with variables more fixed.

More importantly, cross pairs tend to attract less attention, often resulting in less institutional capital congestion and more irrational fluctuations—an absolute paradise for technical traders.

Learning from History to See the Future

To understand the current trend of EUR/JPY, we must review its growth trajectory:

2002-2007: The Golden Era: Eurozone economy surged northward, while Japan stagnated. EUR/JPY climbed from 100 to nearly 170. The logic was simple—stronger always begets stronger.

2008-2009: The Storm: The global financial crisis erupted, prompting investors to flock to safe assets. As a safe haven, the yen demand skyrocketed, and EUR/JPY plummeted to 112. This was a classic “risk aversion” event.

2010-2012: The Debt Quagmire: The European debt crisis hit, Eurozone economy struggled. Despite some recovery, debt shadows lingered, and EUR/JPY continued to decline amid volatility, eventually falling to 94.

2012-2015: The Rebound Path: ECB began to stabilize the market, Eurozone regained stability. Meanwhile, Japan launched “Abenomics,” massive money printing to stimulate the economy. The yen depreciated sharply, and EUR/JPY rebounded to 149. This phase demonstrated policy power.

2015-2020: Policy Race: ECB cut rates and implemented QE, European growth slowed. The BOJ started “tightening,” but less aggressively than ECB. As a result, the euro’s trend was relatively weak.

2020 to Present: The New Era: COVID-19 triggered global easing, but inflation soon surged. ECB was the first to hike rates, while the BOJ still slept. The interest rate differential trading demand skyrocketed, and EUR/JPY entered a long-term rising channel.

What Will Happen Next?

The future of EUR/JPY depends on four major variables:

Eurozone economic strength: If GDP continues to grow, unemployment falls, and inflation remains controllable, the ECB will stay hawkish, supporting the euro.

The BOJ’s policy shift: This is the biggest black swan. Amid high inflation, new BOJ Governor Ueda has begun re-evaluating ultra-loose policies. Once the BOJ hikes rates, a wave of interest rate spread unwinding will erupt instantly, dealing a fatal blow to EUR/JPY.

Global geopolitical situation: Any major international event will trigger safe-haven flows into the yen, pushing EUR/JPY lower.

Commodity prices: Rising energy and food prices will boost inflation expectations, indirectly supporting the ECB stance but may also prompt the BOJ to act.

Currently, in the short term, EUR/JPY still has room to rise, potentially challenging last October’s 148.4 level again. But in the medium to long term, once the BOJ truly begins tightening, this currency pair could enter a decade-long bear market.

Three Practical Trading Tools

The Power of Economic Data Calendar

Never underestimate the impact of monthly CPI, GDP, and unemployment data. When these figures beat expectations, they immediately push the respective currency higher. For example, if Eurozone CPI exceeds forecasts, the market bets on a more aggressive ECB rate hike, and the euro surges. Conversely, the opposite occurs. The key is to prepare before data release and adjust positions immediately after.

The “Code” of Central Bank Officials’ Statements

Never ignore public comments from central bank governors and committee members. Phrases like “persisting with rate hikes,” “patience needed,” or “further observation required” may seem routine, but they imply policy bias. When ECB officials repeatedly express hawkish views, while BOJ officials talk about “necessity of easing,” the upward momentum of EUR/JPY becomes clear.

Technical Indicator Confirmation Signals

RSI Strategy: When RSI crosses above 70 into overbought territory and then falls back below 70, it’s a reliable sell signal. Conversely, when RSI crosses below 30 into oversold and then rises again, it’s a buy signal. The advantage of RSI is its simplicity and clarity, reducing false signals.

MACD Strategy: A golden cross (short-term moving average crossing above long-term) indicates bullish momentum; a death cross signals bearish pressure. This indicator is especially suitable for capturing medium-term trend reversals.

For example, in mid-March 2022, a MACD golden cross signaled a buy; in early April, a death cross prompted a close. In just 19 trading days, a profit of 5.89 yen per euro was achieved. With a standard lot of 100,000 euros, that’s a gain of 589,000 yen.

Practical Trading Guide

Short-term traders should do the following:

Monitor EUR/JPY on the daily chart within its channel. When the price hits resistance and RSI breaks above 70 into overbought, combined with a MACD death cross, it’s a clear sell signal. Set take-profit at the channel midline or RSI 50, and stop-loss at the previous high of 146.76 from December last year. This combo effectively reduces false signals.

Medium to long-term investors need to shift their mindset:

The key is not short-term fluctuations but waiting for the moment when the BOJ policy shifts. When there is concrete evidence that the BOJ will hike rates, the decade-long interest rate spread trade will come to an end. At that point, shorting EUR/JPY will be a major opportunity for a decade. But until then, holding long positions remains the safer choice.

Ultimately, the euro’s trend is determined by policy and economic fundamentals; technical analysis merely helps pinpoint precise entry points. Stick to this logic, and you won’t be misled by short-term noise.