EUR/JPY: Why is this cross currency pair worth paying attention to?

In the foreign exchange market, investors not only focus on the main currency pairs against the US dollar but also on cross currency pairs involving non-USD currencies, which often hide numerous trading opportunities. The euro and the Japanese yen are both major global reserve currencies, but their economic cycles and central bank policies differ significantly, causing the EUR/JPY cross pair to often exhibit more volatile swings than EUR/USD.

Why is EUR/JPY more volatile than the direct pair?

The core reason EUR/JPY attracts traders is that it amplifies the price movements driven by differences in monetary policies. For example, in March 2023, when the European Central Bank announced a 0.5% rate hike, the euro strengthened accordingly. However, EUR/USD’s rise was relatively moderate because the dollar remained in a high-interest-rate cycle. But due to the long-standing ultra-loose monetary policy of the Bank of Japan, EUR/JPY surged 1.1% within four hours after the decision, more than eight times the increase of EUR/USD.

This phenomenon illustrates an important characteristic: cross pairs fully reflect the investment return differences caused by interest rate differentials between two countries. When one side raises rates while the other remains unchanged, the disparity is greatly magnified, allowing traders to capture larger price swings.

Historical background of EUR and JPY

The euro, as the official currency of the European Union, was introduced in 1999 and officially circulated in 2002, becoming the world’s second-largest reserve currency. The yen, following Japan’s post-war economic rise, gradually evolved into an important tool for international trade settlement. Especially after the bubble economy burst in 1990, the Bank of Japan adopted a zero-interest-rate policy, turning the yen into a borrowing instrument for international capital, thereby establishing its safe-haven attribute.

Key turning points of EUR/JPY over the past two decades

2002-2007 Appreciation Period: The eurozone experienced strong economic growth, while Japan’s economy grew slowly. The European Central Bank’s more aggressive policies led to a significant appreciation of the euro against the yen, reaching a historic high near 170 in early 2007.

2008-2009 Financial Crisis Impact: The global financial storm caused capital to flood into safe-haven currencies like the yen, causing EUR/JPY to plummet sharply to around 112.

2010-2012 Euro Debt Crisis Shadow: Ongoing sovereign debt issues in Europe exerted pressure on the euro, causing the exchange rate to fluctuate repeatedly, with a low of 94.

Post-2012 Rebound: As the eurozone debt crisis eased and Japan implemented “Abenomics” with large-scale monetary easing, the yen depreciated continuously, and the euro appreciated strongly, reaching nearly 149 at one point.

2015-2020 ECB Quantitative Easing Phase: To stimulate the economy, the ECB began cutting interest rates and implementing QE, weakening the euro. Later, during the COVID-19 pandemic, global central banks coordinated to rescue markets, boosting risk assets and increasing the demand for carry trades.

From 2020 to Present High Inflation Era: Post-pandemic inflation pressures forced the ECB into a rate hike cycle, while the Bank of Japan hesitated. This policy divergence kept EUR/JPY generally trending upward.

Four core factors influencing EUR/JPY

Economic fundamentals are the primary driver. When the eurozone’s GDP grows steadily and unemployment falls, the economy is in expansion, strengthening the euro. Conversely, if Japanese economic data remains unchanged, EUR/JPY tends to rise.

Central bank policy orientation determines the medium-term direction. Decisions by the ECB to raise or lower interest rates and the BOJ’s monetary policy adjustments can quickly change the cross pair’s trajectory. When the ECB hikes rates while the BOJ maintains easing, carry trade inflows push EUR/JPY higher.

Geopolitical events can sometimes create black swans. Trade wars, elections, regional conflicts, and other sudden events alter market risk appetite, leading to capital inflows or outflows into safe-haven currencies like the yen.

Market sentiment fluctuations also play a role. When global economic outlooks are bleak and investor panic rises, funds tend to flow into safe assets like the yen, causing EUR/JPY to retreat. The opposite can also happen.

Using technical indicators to seize trading opportunities

The RSI indicator is useful for identifying overbought and oversold conditions. When RSI crosses above 70 into overbought territory and then falls back below 70, it signals a potential sell. For example, in June 2021, EUR/JPY showed this pattern, followed by a five-week correction. When RSI recovered to the 50 midline, traders could close positions, realizing a profit of about 2.875 yen per euro. Trading one standard lot of 1 million euros would yield a profit of 28,750,000 yen.

The MACD indicator captures trend reversals through golden and death crosses. On March 14, 2022, EUR/JPY experienced a MACD golden cross, signaling a buy. After 19 trading days, on April 8, a death cross appeared, prompting traders to close positions, with a profit of approximately 5.89 yen per euro. A standard lot of 1 million euros would net a profit of 58.9 million yen.

Future outlook and risk points

In the short term, the ECB appears more hawkish than the Fed and other central banks, and during the banking crisis, it persisted in rate hikes, supporting the euro’s relative strength. Therefore, EUR/JPY is likely to continue rising, potentially testing the 148.4 high from October last year.

However, medium- to long-term risks should be noted. In a high-inflation environment globally, the new Japanese central bank governor may be forced to reconsider ultra-loose policies. Once the BOJ begins tightening monetary policy, the accumulated large interest rate differential positions could be unwound rapidly, causing the yen to appreciate sharply. This would lead EUR/JPY into a long-term downtrend, presenting a decade-long shorting opportunity.

How to judge entry and exit points?

Follow the economic calendar as fundamental homework. Pay attention to key data such as CPI, GDP, and unemployment rates for the eurozone and Japan. When CPI or GDP exceeds expectations and unemployment falls below forecasts, the respective currency usually gains support and rises.

Closely monitor central bank signals. Decisions on interest rates and public statements from the ECB and BOJ can pre-empt policy shifts. Signals of rate hikes or tightening will push the respective currencies higher.

Combine technical analysis for turning points to improve success rates. On daily charts, observe whether EUR/JPY is consolidating, then use RSI and MACD to identify trading opportunities. When RSI drops from above 70 to below 70, consider shorting, with the daily midpoint as a take-profit target and historical support levels as stop-loss points.

In the medium term, investors should closely watch Japan’s inflation trends and the new BOJ governor’s policy stance. Confirming a shift toward tightening would suggest EUR/JPY is at a long-term top, significantly increasing the success rate and risk-reward ratio of short positions.