Euro/Japanese Yen Cross Pair Has Great Potential: Why Are Traders Focusing on This Currency Pair?

In the foreign exchange market, euro trend forecasts often focus on the USD spot rate, but savvy traders have long been eyeing the EUR/JPY cross. Why? Because it offers much richer trading opportunities than the spot.

Why is EUR/JPY Gaining Attention

EUR/JPY is one of the most traded currency pairs among the yen crosses, often exhibiting greater volatility and making it easier to generate excess returns.

Taking the European Central Bank’s rate hike in March 2023 as an example, after the bank announced a 0.5% rate increase, the market was surprised by its hawkish stance. The euro indeed strengthened, but since US interest rates remained higher than those in the Eurozone, the traditional EUR/USD (EURUSD) gains were limited. In contrast, EUR/JPY behaved differently — because Japan was still implementing zero interest rate policy, coupled with the boost from interest rate differential trading, EUR/JPY surged 1.1% within just 4 hours after the decision, more than 8 times the rise of the spot.

This is the charm of the cross.

Key Drivers of EUR/JPY Trends in 2022

The future movement of EUR/JPY will be dominated by the following factors:

Economic Factors: Eurozone GDP, inflation rates, and unemployment data will directly influence the European Central Bank’s policy direction. If Eurozone data continues to improve while Japan’s economy stagnates, the euro will relatively strengthen, pushing EUR/JPY higher.

Monetary Policy: This is the most core driver. The ECB tends to hawkish rate hikes, while the Bank of Japan maintains long-term easing. The greater the policy divergence, the larger the upward potential for EUR/JPY. Notably, whether Japan’s new central bank governor will break the long-standing ultra-loose tradition remains to be seen — once policy shifts, interest rate differential trades may be instantly unwound, causing the yen to skyrocket and EUR/JPY to fall.

Geopolitics: Trade wars, elections, regional conflicts, etc., all can change investor risk appetite, thereby affecting demand for the safe-haven yen.

What Does Historical Trend Tell Us

Since the euro’s physical circulation began in 2002, EUR/JPY has experienced several turning points:

• 2002-2007: Eurozone economy surpasses Japan, with euro reaching a historic high near 170
• 2008-2009: Financial crisis erupts, funds flood into the safe-haven yen, EUR/JPY drops to 112
• 2010-2012: Euro debt crisis impacts, exchange rate further falls to 94
• 2012-2016: Japan implements “Abenomics” quantitative easing, yen depreciates, EUR/JPY rebounds to 149
• 2016-2020: ECB also begins easing, euro weakens
• 2020-2023: Post-pandemic global easing, combined with rising interest rate differential trading demand, EUR/JPY generally rises

History shows that periods of policy divergence are prime for big EUR/JPY moves.

Technical Analysis Signals

For short-term traders, technical indicators provide practical entry and exit references:

RSI Overbought Reversal Strategy: When RSI breaks above 70 into overbought territory and then falls below 70, it usually signals a short-term correction. For example, in 2021, from the sell point to the buy cover, profit reached 2.875 yen per euro. With a standard lot of 1 million euros, that’s about 28.75 million yen profit.

MACD Golden/Death Cross Strategy: Buy when MACD shows a golden cross, sell when a death cross appears. During the March-April 2022 cycle, single-lot gains reached 5.89 yen per euro, approximately 58.9 million yen profit.

While these strategies are simple, the key is to combine them with macro environment and fundamentals.

Will It Continue to Rise? Short, Medium, and Long-Term Outlook

Short-term (next 1-3 months): The European Central Bank is more hawkish, and Citibank analysts believe ECB tightening will outpace the Fed. Under this scenario, EUR/JPY is likely to continue strengthening, possibly retesting last October’s high of 148.4.

Medium-term (3-6 months): Focus on oil prices. OPEC production cuts boost oil, increasing global inflation pressures, prompting the Bank of Japan to reconsider its easing stance. Once policy shifts, a wave of interest rate differential unwinding could trigger a sharp appreciation of the yen, putting EUR/JPY under correction pressure.

Long-term (beyond half a year): If the Bank of Japan truly changes policy, EUR/JPY could enter a long-term downtrend, presenting a decade-long shorting opportunity.

How to Capture Entry and Exit Points

Step 1: Follow the economic calendar. Watch key data like CPI, GDP, and unemployment rates in the Eurozone and Japan. Better-than-expected data usually boosts the respective currency.

Step 2: Monitor central bank statements. Public comments from ECB and BOJ governors often signal policy shifts. Rate hikes or easing adjustments are key references.

Step 3: Use technical tools. Employ trendlines, moving averages, RSI, MACD, etc., to confirm entry and exit points.

Practical advice: For short-term trading, refer to daily charts — when prices hit upper channel resistance and RSI shows overbought or MACD shows death cross, consider selling, using the previous high of 146.76 in December as a reference. For medium and long-term, focus on Japanese inflation and central bank officials’ comments; once policy shift is confirmed, shorting opportunities will emerge.

Forex trading has no absolute rise or fall; only constantly changing fundamentals and technicals. Mastering the driving logic behind EUR/JPY is key to sustained profits in this cross.