Will the Euro continue to strengthen? EUR/JPY Cross Pair Outlook Analysis

In the cross currency market, EUR/JPY is one of the most traded pairs in terms of trading volume among yen crosses. Compared to the spot market, this cross often exhibits greater volatility during specific periods, offering traders more opportunities. So, will the euro continue to appreciate? What is the future trend of EUR/JPY? This article will analyze in depth from fundamental, technical, and historical patterns.

Understanding the Currency Characteristics of the Euro and Yen

The euro (EUR) was introduced in 1999 and began physical circulation in the Eurozone in 2002. It has now become one of the world’s most important reserve currencies. Although the Japanese yen (JPY) has a shorter development history, its international status rapidly increased after Japan became the world’s second-largest economy.

Notably, after the bubble economy burst in the 1990s, the Bank of Japan implemented a zero interest rate policy, making the yen a funding currency for arbitrage trading. International funds borrowed large amounts of yen to invest in high-yield assets, driving demand for the yen and causing exchange rate fluctuations. This also explains why EUR/JPY has become a focus for traders—it reflects arbitrage opportunities created by monetary policy differences between the two major economies.

Why is EUR/JPY Worth Watching?

Interest Rate Differential as an Engine

The uniqueness of EUR/JPY lies in the interest rate differential. For example, in March 2023, when the European Central Bank (ECB) announced a 0.5% rate hike, although US dollar interest rates remained higher than euro rates, EUR/USD had limited gains. However, because Japanese interest rates remained near zero for a long time, the interest rate spread was activated, and EUR/JPY rose by 1.1% during the same period, which was 8.5 times the increase of EUR/USD.

High Correlation with Other Major Currencies

EUR/JPY has a high positive correlation with other major currency pairs, especially EUR/USD and USD/JPY. This relationship allows traders to use long and short strategies to optimize returns and risk management.

Rich Fundamental Drivers

Economic data from Europe and Japan, central bank policy adjustments, geopolitical events, and more directly influence this cross, creating abundant trading opportunities.

Four Turning Points in the Historical Trend of EUR/JPY

2002-2007: The Euro Appreciation Era

The Eurozone economy continued to grow, while Japan’s economic growth was sluggish. Driven by different monetary policies, the euro appreciated significantly against the yen. In early 2007, EUR/JPY approached a historic high near 170.

2008-2009: Safe-Haven Flows During the Crisis

The global financial crisis triggered market panic, with funds flowing into the safe-haven yen. EUR/JPY plummeted during this period, reaching a low near 112 in early 2009.

2010-2012: Impact of the Euro Debt Crisis

The European sovereign debt crisis exerted continuous pressure on the euro. EUR/JPY showed a downward trend, falling to around 94 in mid-2012.

Post-2012: Policy-Driven Uptrend

European economic conditions gradually improved, and Japan implemented “Abenomics” with large-scale easing policies. The yen depreciated relative to the euro, and EUR/JPY entered a long-term upward trend, reaching close to 149 at one point.

Between 2015 and 2020, the ECB lowered interest rates and implemented quantitative easing, which temporarily constrained the euro’s strength. However, after the COVID-19 pandemic, global easing policies and Europe’s subsequent rate hikes pushed EUR/JPY higher again, especially after 2021 when rising inflation prompted the ECB to tighten, maintaining an upward trend.

Four Major Factors Determining the Future Rise or Fall of the Euro

Economic Data’s Decisive Role

Eurozone GDP growth, inflation, and unemployment rates directly reflect economic health. When European data improves while Japan’s economy remains stable, the euro is more likely to strengthen, pushing EUR/JPY higher. Conversely, the opposite applies.

Central Bank Monetary Policy Directions

Decisions by the European Central Bank (ECB) and Bank of Japan (BOJ) are decisive. If the ECB hikes rates while the BOJ maintains easing, the interest rate differential widens, benefiting EUR/JPY. However, if the BOJ begins tightening, the yen could appreciate rapidly, exerting downward pressure on EUR/JPY.

Geopolitical and Global Risk Appetite

Trade tensions, election cycles, geopolitical tensions can alter market risk sentiment. When risk aversion rises, funds tend to flow into safe-haven currencies like the yen, putting pressure on EUR/JPY.

Energy and Commodity Prices

Rising oil prices increase global inflation, further testing central bank policies. Events like OPEC production cuts can indirectly influence exchange rates through inflation expectations.

Technical Analysis Signals for Trading

Technical indicators can help capture short-term opportunities. For example, when RSI exceeds 70 indicating overbought conditions, a subsequent decline below 70 can be seen as a potential sell signal. Historical data shows such signals often yield profits of 2-3%.

The golden and death crosses of MACD are also meaningful. A golden cross suggests a buy, while a death cross indicates a potential exit. Historically, such strategies have a profit potential of around 4-6%.

Moving averages combined with channel analysis can help identify trend directions and support/resistance levels. Daily charts are generally more suitable for medium- and short-term traders.

The Logic and Limitations of Euro Appreciation

Reasons for Appreciation

During banking crises, the ECB has shown a more hawkish stance than the Fed, with a clear intention to hike rates by 0.5%. Many institutions believe the ECB’s tightening may lead other central banks, providing a basis for euro appreciation. In the short term, EUR/JPY is likely to continue rising, with technicals suggesting a possible retest of last October’s high of 148.4.

Risks of Appreciation

In a high-inflation environment globally, especially after OPEC’s production cuts pushing oil prices higher, the new BOJ governor may be forced to reassess ultra-loose policies. If this long-standing easing is adjusted, large-scale arbitrage trades could unwind, leading to rapid yen appreciation, and EUR/JPY could enter a medium- to long-term downtrend. In such scenarios, the exchange rate could decline significantly over a decade.

Practical Methods to Capture Trading Opportunities

Monitoring Economic Data Calendar

Pay attention to CPI, GDP, and unemployment data releases from Europe and Japan. Surprises often drive currency appreciation, serving as key turning points.

Central Bank Statements and Decisions

BOJ rate decisions and ECB speeches have direct market impact. Hawkish comments support currency appreciation, dovish comments support weakening.

Technical Confirmation

Short-term strategies can reference daily charts. When prices hit channel resistance, RSI breaks above 70 then falls back below, or MACD shows a death cross, consider selling signals targeting the daily median line or last December’s high of 146.76.

Medium- to Long-Term Perspective

Closely monitor whether the BOJ abandons easing. Once policy shifts are confirmed, yen appreciation potential is large, and shorting EUR/JPY could be a cyclical opportunity over years.

Overall, the euro still has room to rise in the short term, but the medium- to long-term trend heavily depends on the BOJ’s policy changes. Traders should stay flexible and adjust strategies dynamically based on fundamental and technical developments.