Euro Trend Outlook: Why EUR/JPY Cross Pair is Worth Watching

In the foreign exchange market, cross currency trading often harbors greater opportunities than direct USD pairs. EUR/JPY, as one of the most traded yen crosses globally, offers unique profit potential due to its volatility characteristics and carry trade effects.

Euro and Yen: The Battle of Two Central Bank Policies

Since its official circulation in 2002, the euro (EUR) has become the second-largest reserve currency worldwide. As a symbol of European economic integration, EUR movement is profoundly influenced by the European Central Bank (ECB) policy stance and the eurozone economic performance.

The Japanese yen (JPY) plays the role of a safe-haven currency. Since the bubble burst in Japan during the 1990s, the Bank of Japan (BOJ) has maintained an ultra-loose monetary policy, keeping interest rates near zero. This policy framework has established the yen as a “funding currency” for carry trades—global investors borrow low-interest yen to invest in higher-yield assets.

EUR/JPY: Why Is Its Volatility Greater Than the Direct Pair

Compared to EUR/USD’s steady fluctuations, EUR/JPY has notable advantages:

Amplified interest rate differential effects. When the ECB raises rates while the BOJ maintains easing, the interest rate gap widens. For example, in March 2023, when the ECB raised rates by 0.5%, despite the USD still being in a rate hike cycle with higher rates, the direct EUR/USD rose only modestly, but EUR/JPY surged 1.1% within four hours of the decision, far exceeding the 8.5 times increase of the direct pair.

Liquid cross market. As the second most traded yen cross, EUR/JPY provides ample liquidity and relatively stable spreads.

Multiple driving factors. EUR movement is driven by European economic data and ECB policy; JPY movement depends on BOJ stance and global risk appetite. The combination of these independent variables often results in larger volatility.

Looking at History to Understand the Present: Key Turning Points in EUR/JPY

2002-2007: The Appreciation Wave
Eurozone economies expanded strongly, while Japan’s growth was sluggish. Diverging policies between the ECB and BOJ pushed EUR/JPY to a historic high near 170.

2008-2009: Crisis Shock
The global financial crisis triggered a risk-off wave, capital flowing into the yen, causing EUR/JPY to plummet to around 112.

2010-2012: Euro Debt Shadow
The eurozone sovereign debt crisis caused EUR/JPY to fluctuate downward, reaching around 94.

2012-2016: Abenomics Era
Japan implemented large-scale easing to stimulate the economy, while eurozone economic conditions improved, leading EUR/JPY to resume an upward trend, peaking near 149.

2016-2020: Diverging Central Bank Policies
The ECB’s quantitative easing pressured the euro downward. Meanwhile, strong global risk asset performance increased demand for yen carry trades.

2020–present: Pandemic and Inflation Challenges
The COVID-19 pandemic sparked a wave of easing by global central banks. Subsequently, rising inflation prompted the ECB to start rate hikes, while the BOJ resisted tightening. This policy divergence has been the main driver of the current EUR/JPY rise.

Key Factors Shaping the Future

Interest rate differentials. This is the core driver of EUR/JPY. The attitude of the new BOJ governor Ueda on easing directly impacts the long-term trend. Once the BOJ begins rate hikes, large-scale carry trade unwinding will strengthen the yen and push EUR/JPY lower.

Economic data performance. The relative strength of eurozone GDP, CPI, and unemployment rates determines the euro’s direction. If Europe remains resilient while Japan stagnates, the euro will tend to strengthen, and vice versa.

Geopolitical risks. The ongoing threat of Ukraine conflict to European energy supplies and other global uncertainties influence risk sentiment, thereby affecting yen safe-haven demand.

Commodity price movements. Oil and commodity prices impact inflation expectations and thus central bank policies. OPEC production cuts often serve as catalysts for market reassessment of inflation outlooks.

Practical Trading Strategies

RSI Overbought Reversal Strategy
When RSI crosses above 70 into overbought territory and then falls back below 70, it signals a sell. For example, in mid-2021, RSI retreated to the midline 50 within five weeks after overbought, allowing for profit-taking. This strategy yielded a profit of 287,500 yen per position.

MACD Golden and Death Crosses
Buy when the MACD fast line crosses above the slow line (golden cross), sell when it crosses below (death cross). During March–April 2022, a single trade with 19 days yielded 589,000 yen. Suitable for capturing medium-term trends.

Channel Breakout Strategy
Identify support and resistance levels; when price hits resistance, combine RSI overbought signals and MACD death cross to identify tops, set stop-loss at recent highs, and target profit at the midline or key support levels.

Short, Medium, and Long-Term Outlook for EUR/JPY

Short-term (3-6 months)
The ECB’s hawkish stance is clearer than the Fed and other developed central banks, supporting the euro. Meanwhile, the BOJ’s hesitant policy maintains carry trade momentum. EUR/JPY is likely to challenge the October 2023 high of 148.4.

Medium-term (6-18 months)
The key variable is the BOJ’s policy shift. If Japan’s inflation persists and the new governor is forced to change from ultra-loose to tightening, carry trades will unwind rapidly, possibly causing a sharp yen appreciation and a correction in EUR/JPY. Investors should monitor BOJ meeting minutes and governor’s speeches closely.

Long-term (over 18 months)
If the BOJ normalizes policy, a decade-long unwinding of carry trades will fundamentally reshape EUR/JPY, opening a long-term shorting opportunity. This would be the market’s most significant structural shift.

How to Precisely Capture Trading Opportunities

Monitor Economic Data Calendar
Pay attention to eurozone CPI, unemployment, manufacturing PMI, and Japanese core CPI and central bank decisions. Better-than-expected data usually support the currency.

Central Bank Decisions and Policy Statements
ECB and BOJ rate decisions, forward guidance, and governor speeches are key turning points. Especially watch for subtle shifts in tone regarding policy stance.

Combine Technical and Fundamental Analysis
Avoid relying solely on one tool. The ideal approach is to confirm the overall fundamental trend and then use technical tools for precise entry and exit points. For example, during a confirmed ECB rate hike cycle, use RSI overbought retracements for short-term longs.

Risk Management Is Crucial
Set clear stop-loss levels, typically below recent support or above recent highs. Adjust position sizes according to account size to prevent a single loss exceeding 2% of total capital.

The future direction of the euro will ultimately determine EUR/JPY. Traders who stay attuned to central bank policies, economic data rhythms, and technical signals can continue to profit in this highly liquid and volatile market.