The euro edged 0.15% higher to around 185.00 against the yen in Monday’s European session, lifting EUR/JPY as markets price in the chance of a near-term European Central Bank rate rise aimed at keeping Eurozone inflation aligned with its 2% target. Recent ECB commentary has focused on renewed inflation pressure and the need for a prompt policy response to contain price growth.
Policy attention has also turned to energy risks after ECB Governing Council member Yannis Stournaras warned that a closure of the Strait of Hormuz, through which almost 20% of global energy supply passes, could feed through into wages and the prices of goods and services, complicating the inflation path back to 2% over the medium term. Separately, Bloomberg reported that Austrian central bank head Martin Kocher said following a May 22–23 meeting in Cyprus that the ECB is on track for a rate increase next month unless a durable US–Iran peace arrangement emerges, while the yen eased ahead of Bank of Japan Governor Kazuo Ueda’s speech on Wednesday and May Tokyo CPI data due on Friday.
Monetary Policy Divergence and Its Impact on EUR/JPY
Given the European Central Bank’s increasingly firm stance on inflation, we see a clear divergence in monetary policy emerging against the Bank of Japan. Recent Eurozone flash HICP data for May showed inflation ticking up to 2.3%, slightly above expectations and reinforcing the ECB’s hawkish bias. This suggests the path of least resistance for the EUR/JPY is upwards in the near term.
The ongoing tensions around the Strait of Hormuz continue to support this view, keeping energy prices elevated with Brent crude currently holding firm near $95 a barrel. Market expectations, reflected in overnight index swaps, are now pricing in a greater than 90% probability of a 25-basis-point ECB rate hike in June. We believe this makes long-Euro positions attractive against currencies with more passive central banks.
In contrast, the Japanese yen is likely to remain under pressure. The most recent Tokyo CPI data, a key indicator for nationwide trends, came in below the Bank of Japan’s 2% target, giving officials no reason to consider tightening policy. This policy gap between an active ECB and a stationary BoJ is the central theme driving our strategy.
Derivative Trading Strategies for the Rising EUR/JPY
For derivative traders, this environment favors strategies that profit from a rise in EUR/JPY. We are looking at buying EUR/JPY call options with expirations in late June or July to capture the expected move following the ECB’s next meeting. One-month implied volatility in the pair has already climbed to over 12%, indicating the market is anticipating a significant price swing.
To manage the higher cost of these options due to rising volatility, we also see value in constructing bull call spreads. By buying a call option and simultaneously selling another call at a higher strike price, traders can reduce the initial premium paid. This strategy caps the potential upside but offers a more cost-effective way to position for a moderate, controlled rally in the currency pair.
