EUR/JPY traded near 187.20 during Asian hours on Monday, after modest gains the previous day. The pair was steady as the Euro moved little after German ZEW survey data.
Germany’s ZEW Economic Sentiment fell to -17.2 in April, below the -5 forecast and down from -0.5 in March. The Current Situation index dropped to -73.7, missing -70.0 and falling from -62.9.
The Eurozone ZEW Economic Sentiment index declined to -20.4, compared with expectations of -3.6. The data added to weak sentiment readings across the region.
ECB Vice President Luis de Guindos said private credit is a source of risk to financial stability, alongside elevated market valuations and loose fiscal policy in some countries, Reuters reported. The comments were made during European trading on Tuesday.
The Japanese Yen remained under pressure amid uncertainty about the Bank of Japan’s policy outlook. The BoJ is expected to raise inflation forecasts and cut growth projections due to higher energy costs and headwinds linked to the Iran conflict.
Nikkei reported the BoJ may keep interest rates unchanged at 0.75% on 28 April. Other reports said the BoJ is assessing the Middle East conflict and may point to renewed policy normalisation as early as June.
We are seeing EUR/JPY hold around 187.20 despite a sharp downturn in German economic sentiment. The ZEW survey’s plunge to -17.2 signals significant headwinds for the Eurozone’s largest economy. This weakness in the Euro is being counteracted by pressure on the Japanese Yen.
Recent Destatis flash estimates showing German CPI for April dipping to 1.9% year-over-year further solidify the case for a cautious European Central Bank. This data suggests the ECB will be in no rush to tighten policy, potentially capping the Euro’s strength in the medium term. The central bank’s own warnings about private credit risk reinforce this hesitant outlook.
The main driver for this currency pair, however, remains the Bank of Japan’s policy outlook. With the BoJ expected to hold its rate at 0.75% during its meeting on April 28, the Yen’s yield disadvantage continues to be the dominant theme. Market pricing, reflected in overnight index swaps, now suggests only a 15% probability of a BoJ rate hike before July, reinforcing the dovish sentiment.
This dynamic feels familiar, as we remember the sharp JPY depreciation trends back in 2023 and 2024. During that period, the BoJ’s ultra-loose policy consistently outweighed weakness in its counter-currencies, leading to prolonged trends. The current uncertainty surrounding the Middle East conflict and rising energy costs gives the BoJ more reason to delay any significant policy normalization.
Given this backdrop, traders anticipating continued JPY weakness could consider buying EUR/JPY call options with strike prices above 188.00 to capitalize on a potential move higher. Alternatively, with the upcoming BoJ meeting, implied volatility for one-month options has ticked up to 9.5%. A long straddle strategy could be used to profit from a significant price move in either direction, should the BoJ deliver a major surprise.
