What is EUR/JPY?
EUR/JPY is the currency pair that shows the value of the Euro against the Japanese Yen. The left side of the pair is called the base currency, in this case the Euro, and the right side is called the quote currency, in this case the Japanese Yen. This exchange rate tells you how many Yen you need to buy one Euro. For example, if the EUR/JPY pair is trading at 146.50, it means that you need 146.50 Yen to buy one Euro. So, when the pair is going up in price, the Euro is said to be appreciating or getting stronger and the Japanese Yen is depreciating or getting weaker, and vice versa when the pair is going down in price.
What are the most important EUR/JPY charts for traders to follow?
There are different ways you can display the exchange rate price movements on a chart. The most common ways include a line chart or a bar chart, but the most popular and used one is the candlestick chart. The candlestick chart shows you instantly and in real time where the price has opened, closed and how much up and down it went on any given timeframe.
Let’s say you want to check EUR/JPY price on a daily timeframe. You go to your charting software, select the timeframe and select the candlestick chart (if it’s not set by default). This is what you would see on tradingview.com
Is EUR/JPY a good pair to trade for beginners?
EUR/JPY can be a very good pair to trade when you have a monetary policy divergence between the two central banks backing the currencies, the European Central Bank (ECB) for the EUR and the Bank of Japan (BoJ) for the JPY. For example, if the ECB is raising interest rates and the Bank of Japan is keeping them at zero, then you have a policy divergence and, in such cases, you would see the relative currency pair appreciate or going up. Moreover, the JPY is considered a safe haven currency and it sees inflows when there’s risk aversion in the market. This makes JPY pairs sensitive to the risk sentiment and you will see EUR/JPY going up when there’s risk on sentiment and going down when there’s risk off sentiment.
What session is best to trade the EUR/JPY?
The best times to trade EUR/JPY is during the European and North American Session. This is because in the Asia-Pacific (APAC) Session there’s less volume and even though the news for Japan is released in the APAC session and can offer good trading opportunities, the movements get extended during the next two major sessions.
Moreover, in the European session you get the news and events for the Eurozone and in the North American session the news for US. US news are always the most important as the US is the biggest economy in the world and it can single-handedly spur global growth or bring the whole world into a recession. The Federal Reserve is also the most important central bank in the world. That’s why US news move the EUR/JPY pair even though there’s no USD in the pair.
Is the EUR/JPY an important cross or trading pair?
The Yen strength is important for the Japanese because the Japanese economy is export oriented and the value of the Yen can impact different things from the profits companies earn to the inflation rate in the overall economy. The Japanese prefer a weak Yen because it increases exports, but they don’t like an appreciation or depreciation that is too fast and goes on for too long. If the EUR is getting stronger against the Yen, then it increases the purchasing power of European consumers and businesses who can buy more Japanese goods and services. On the other hand, a strong Yen decreases the purchasing power of the European people who may want to buy less Japanese stuff and therefore decreases Japanese exports.
Will EUR/JPY go up or down?
In the current context of monetary policy divergence between the ECB hiking rates and the Bank of Japan keeping them at zero and doing quantitative easing (QE), the EUR/JPY pair rallied for years now. Since the trough in 2020 to the current level, the pair appreciated more than 29% and more than 18% since the divergence started to become clear when the BoJ stressed its commitment in keeping its policy very loose. But what are the reasons for JPY to appreciate when inflation starts to clearly ease, and the global growth outlook worsens even more? I think the central banks will keep on tightening even during the recession and that will weigh on growth. This will lower inflation and maybe even lead to some deflation. In turn the central banks will respond with rate cuts and that expectation will void the monetary policy divergence. The Yen safe haven status coupled with the unwinding of the carry trades we saw up to now on policy divergence, will lead to more and more appreciation.
How does risk and volatility affect EUR/JPY?
The EUR/JPY pair is sensitive to risk sentiment, so when there’s risk aversion in the market you can generally see the JPY appreciate and when there’s risk taking sentiment in the market you can see the EUR getting bid. Volatility is often seen in a bad way and associated with stress in the market. So, when traders talk about high volatility, they generally mean it in a negative way. In reality volatility is neutral, it works both ways, it just shows how much a pair moves in a given period compared to a benchmark. Volatility also picks up during important events be it some news, a central bank meeting or some kind of global event. In such instances you will see the pair move faster and it will require more focus on the risk management side.
How has the war in ukraine affected EUR/JPY?
The Russia-Ukraine conflict impacted negatively the European energy markets and energy prices skyrocketed. Although the situation is better than it was months ago, prices are still high, and companies and citizens are getting squeezed hard. The really high inflation that got worse after Russian-Ukrainian conflict is forcing the ECB to tighten monetary policy aggressively, which eventually leads to a really bad recession. These are all negative factors for the EUR, but the strong monetary policy divergence between ECB and BoJ supported anyway the Euro and made it to appreciate against the Yen.
The first reaction back in February-March when Russia invaded Ukraine was a selloff in the EUR/JPY pair as the market feared some wider escalation. The market though generally looks past such geopolitical events pretty fast when they don’t have a wider impact on the world. The only thing that this conflict brought is more inflation on the energy and food side, so the market started to focus on inflation. This resulted in the market pricing in a more aggressive ECB to come as they need to lower demand to bring it in equilibrium with the low supply. The Euro, after selling off for a week after the Russian invasion of Ukraine, started an uptrend since.
How to trade EUR/JPY?
The best way to trade currencies in general is to have a fundamental idea for direction, which is generally based on macroeconomics such as central bank’s monetary policy, growth, inflation and so on, and technical analysis for risk management. For example, let’s say that you have the monetary policy divergence between the ECB and the BoJ telling you that fundamentally the pair should go up. So, you will want to mainly take long positions. You also need to manage your risk though. Where can you enter in order to have a small risk exposure but a bigger profit potential? You can use technical analysis.
So, you open the EUR/JPY chart and use technical concepts like support and resistance, trendlines, indicators and so on to decide where to open a trade. For example, in the chart below you can see how you could use the previous swing levels as support for your long positions. You could have tried a trade with the first support and losing a little as the price continued to fall. But having conviction in your fundamental view and the direction the pair should follow, you could enter again at the last swing support level having even a better risk to reward trade. In fact, the first trade was a 1:2.5 risk to reward ratio trade, but the second was a 1:4.7 risk to reward trade which not only would have given you back your first loss but also yielded an extra 3.7 gain.
Where can I trade EUR/JPY?
You can trade EUR/JPY or any other Forex pair with a broker. Always choose a good, reputable and regulated broker to avoid unnecessary problems. When you open a trading account with a broker, you will have to deposit money to be able to trade and then use the broker trading platform to execute your trades. Most retail brokers let you trade on MetaTrader 4 or MetaTrader 5, which are two of the most famous and popular trading platforms among retail traders. Most retail brokers offer CFD trading for Forex, although you can also trade EUR/JPY via other derivatives like futures or options that are more expensive than CFDs.
EUR/JPY correlation
What drives the EUR/JPY pair the most is monetary policy divergence between the ECB and the BoJ and risk sentiment. In normal times, when there’s risk on sentiment you can see the EUR/JPY appreciating all else being equal, while during risk off flows you can see the JPY gaining strength. The other driver as previously mentioned is monetary policy divergence. This divergence increases or decreases the so-called yield spread, which is the differential between European Bonds returns versus the Japanese ones. Investors generally want the highest profits for the least amount of risk.
So, when the European yields are rising, investors prefer to buy European assets which means selling Yen and buying Euros and vice versa when yields in Eurozone fall or the Japanese ones rise. In the chart below you can see how the EUR/JPY pair is correlated with the spread between the European and Japanese bond yields.
You can also see the correlation that shows how the JPY pairs are sensitive to risk sentiment by comparing EUR/JPY to other JPY pairs (even though the monetary policy divergence is the main culprit in 2022). In the example below you can see the correlation between EUR/JPY, GBP/JPY and CAD/JPY. Notice how they all look similar.
