What is the outlook for the euro exchange rate trend? Why has EUR/JPY become a trading hotspot?

In the foreign exchange cross market, EUR/JPY is highly regarded for its volatility characteristics and trading opportunities. So how will this currency pair evolve in the future? How does it differ from the spot market? And how can traders seize the trading opportunities within?

Why Pay Attention to EUR/JPY Exchange Rate Trends?

EUR/JPY is one of the most traded pairs in the Japanese yen cross market, and compared to the EUR/USD spot, it often exhibits greater volatility during certain periods, creating more profit potential for traders.

Taking the March 2023 European Central Bank (ECB) rate hike as an example. When the ECB announced a 0.5% rate increase, the market was surprised by its hawkish stance. Although the euro strengthened afterward, because the Federal Reserve’s interest rates remained higher than the ECB’s, the traditional EUR/USD spot saw limited gains. However, due to the Bank of Japan maintaining zero interest rate policy and the momentum from carry trades, EUR/JPY rose 1.1% within four hours after the rate decision, far exceeding the gains in the spot market—this was 8.5 times the EUR/USD increase.

This volatility advantage is a key feature not to be overlooked in EUR exchange rate movements. Additionally, EUR/JPY has a high positive correlation with EUR/USD and USD/JPY, meaning traders can utilize long-short combination strategies to optimize risk-reward ratios.

EUR and JPY: A Comparison of Two Major Currencies in Circulation

The euro (EUR) was introduced as an official settlement currency in 1999 and became physically circulated in 2002. It is now the largest currency in Europe and a major global reserve currency.

The Japanese yen (JPY) began to be used in international settlements after Japan joined the International Monetary Fund. After experiencing economic growth and liberalization of exchange, the yen’s status gradually improved. However, after the bubble burst in the 1990s, the Bank of Japan adopted zero interest rate easing policies, and large international capital inflows into yen-denominated high-yield assets turned the yen into a safe-haven currency, with demand fluctuating with global risk appetite.

Therefore, EUR/JPY reflects the differing monetary policy stances and economic cycles of the two major economies.

Historical Trends of EUR/JPY: Five Key Phases

2002-2007: The Euro Appreciation Era

The Eurozone economy continued to grow, while Japan’s economy was sluggish. Under different monetary policies, the euro appreciated significantly against the yen, reaching a historic high near 170 in early 2007.

Late 2007 - Early 2009: Financial Crisis Impact

The global financial crisis led to risk asset sell-offs, with funds flocking into the yen for safety, causing EUR/JPY to plunge to a low of 112.

2009-2012: Eurozone Debt Crisis

Despite global economic recovery, concerns over sovereign debt crises in the Eurozone caused EUR/JPY to decline repeatedly, falling to 94 in mid-2012.

Mid-2012 - Early 2015: Policy Shift Period

Eurozone debt issues were brought under control, while Japan implemented “Abenomics” with large-scale easing. The yen depreciated, the euro appreciated, and EUR/JPY rose close to 149.

2015 - Present: Volatility Adjustment Period

The ECB’s quantitative easing, slowing economic growth, the global liquidity easing from COVID-19, and recent inflation-driven rate hikes have caused EUR/JPY to exhibit multi-wave characteristics.

Core Factors Influencing EUR Exchange Rate Trends

Economic Data as Signals

GDP growth, inflation rates, and unemployment data are key indicators of economic cycles. When the Eurozone’s GDP continues to grow and unemployment declines, economic momentum is positive, and the euro tends to strengthen; if Japan’s economic data remains stable, EUR/JPY is more likely to rise. Conversely, the opposite applies.

Decisive Impact of Central Bank Policies

The policies of the European Central Bank (ECB) and Bank of Japan (BOJ) are crucial. If the BOJ maintains easing while the ECB enters a rate hike cycle, the euro will appreciate, pushing EUR/JPY higher; if the BOJ shifts toward tightening, the carry trade unwinding will significantly boost the yen, lowering EUR/JPY.

Geopolitical and Market Sentiment

Trade conflicts, election risks, geopolitical tensions can trigger risk aversion among investors, leading to yen inflows and dragging down EUR/JPY.

Technical Trading Opportunity Identification

RSI Overbought Reversal Strategy Example

On the weekly chart of EUR/JPY, when RSI crosses above 70 into overbought territory, and then falls back below 70, it is considered a sell signal. For example, from June to July 2021, RSI reverted from overbought to the midline 50, resulting in a single trade profit of about 287,500 yen (based on 100,000 euros per lot).

MACD Golden/Death Cross Strategy Example

On March 14, 2022, MACD formed a golden cross, signaling a buy; 19 trading days later, on April 8, a death cross appeared, triggering a sell to close position. This strategy yielded approximately 589,000 yen profit per lot.

These technical tools help traders precisely time entries and exits amid choppy markets.

Current Outlook for EUR/JPY

In the short term, the ECB maintains a hawkish stance with a 0.5% rate hike amid banking crises, more aggressive than the Fed. Citibank believes the ECB’s tightening pace may surpass that of the US, supporting a stronger euro. Therefore, EUR/JPY is more likely to continue rising, with a correction target possibly at last October’s 148.4 level.

However, medium- to long-term risks should be watched. In an environment of high inflation, especially with rising oil prices, markets expect the new BOJ governor to reassess the sustainability of ultra-loose policies. If policy shifts toward tightening, the carry trade positions built over years could unwind massively, causing the yen to appreciate sharply, presenting a decade-long bearish opportunity for EUR/JPY.

Practical Methods to Capture EUR Exchange Rate Trends

Follow Economic Data Releases

Closely monitor CPI, GDP, and unemployment figures from the Eurozone and Japan. When CPI or GDP exceeds expectations, or unemployment is lower than forecast, the respective currency tends to strengthen.

Monitor Central Bank Movements

BOJ rate decisions, speeches by ECB governors, and other policy signals are key references. Signs of rate hikes or tightening will support the respective currencies.

Use Technical Indicator Combinations

On daily charts, consider RSI and MACD together. When RSI breaks above 70 and then falls below, or MACD forms a death cross, it signals a sell opportunity. Use the RSI midline or channel midline as take-profit references, with the previous high of 146.76 in December as a stop-loss.

Leverage Currency Channel Strategies

In the short term, when EUR/JPY reaches the upper boundary of a consolidation channel with overbought signals, consider executing a sell. In the medium to long term, closely observe Japanese inflation data and central bank statements. Once policy shifts are confirmed, the yen’s strengthening potential is significant, providing rare shorting opportunities.

Mastering the rhythm of EUR/JPY trading requires attention to both macro policy fundamentals and technical signals simultaneously.