EUR/JPY fell to about 183.60 after rising above 187.50, giving back recent gains. The move followed policy updates in Europe and renewed intervention warnings from Japan.
The European Central Bank kept rates unchanged at its April meeting. The main refinancing rate stayed at 2.15%, the marginal lending facility at 2.4%, and the deposit facility at 2%.
ECB Signals Rising Two Way Risks
The ECB said recent data broadly matched expectations. It warned that upside risks to inflation and downside risks to growth have increased, linked to higher energy prices and geopolitical tensions in the Middle East.
The ECB repeated a data-dependent, meeting-by-meeting approach and said it is not committing to a set rate path. It said long-term inflation expectations remain anchored, while short-term expectations have risen.
In Japan, Finance Minister Satsuki Katayama said decisive action in the foreign exchange market is nearing. This came as USD/JPY moved above 160.00, raising expectations of possible official action.
Higher oil prices also weighed on Japan’s outlook as an energy importer. This limited support for the yen despite the warnings.
Intervention Risk Dominates Near Term Trading
Eurozone data was mixed, with Germany’s GDP up 0.3% in Q1 and the unemployment rate at 6.4%. The Eurozone HICP rose 3% year on year in April.
Attention then turned to ECB President Christine Lagarde’s press conference. The report was corrected at 13:05 GMT to state EUR/JPY was around 183.60, not 186.60.
The conflicting signals from the European Central Bank and Japanese authorities create an environment of high uncertainty, making directional bets on EUR/JPY very risky. We see the pair retreating from over 187.50, and this pullback is likely to continue with sharp, unpredictable moves. The best immediate response is to reduce outright long positions and prepare for a spike in volatility.
This situation is ideal for buying options rather than trading the spot currency directly. One-month implied volatility for EUR/JPY has jumped from around 8.5% to over 12% in the last few weeks, showing the market is bracing for a significant price swing. We should consider buying straddles or strangles to profit from a large move, whether it’s up or down.
The warnings from Tokyo are becoming very serious, echoing the actions we saw back in 2022 when they intervened to defend the yen as USD/JPY crossed 150. With the key level now cited as 160 for USD/JPY, the threat of direct intervention is the highest it has been in years, making a sudden, sharp strengthening of the yen a real possibility. We should be purchasing some out-of-the-money EUR/JPY put options to hedge against this event.
On the other side, the ECB is trapped between rising inflation, which just hit 3% for the Eurozone, and weakening growth, as seen in Germany’s rising 6.4% unemployment rate. This indecision means any surprise in upcoming inflation data could force a hawkish pivot, sending the euro higher. This justifies holding some exposure to upside through call options, even as we hedge the downside.
The options market is pricing in this tension, with the skew showing a growing premium for puts over calls. This tells us the market is more fearful of a sudden drop from Japanese intervention than a rally driven by the ECB. We can use this by structuring trades like put spreads, which cheapen the cost of betting on yen strength while clearly defining our risk.
