Potential signal:
- I am comfortable buying here, but anything below 182 signals a potential “reset.” I believe we are looking to get to 160 for this move.
- The euro continues to be very noisy against the Japanese yen, but more than anything else at this point, bullish.
- The 182 level seems to be the current floor.
The euro continues to be very noisy against the Japanese yen, and it did pull back a little bit during the early hours on Wednesday, but I still see it as very bullish. The 182 yen level underneath, I think, is going to be a short-term floor, and I think right now we are basically in an immediate consolidation range.
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That being said, the ECB is expected to hold its rate steady in most of 2026, which, with inflation hovering around 1.8% keeps it right about where it wants to be. On the other hand, the Bank of Japan's policy rate is currently around 0.75%, and while they have hiked from negative territory, the pace is extraordinarily slow.
Central Bank Policy Divergence
The Bank of Japan is not expected to hike again in January, and I think a lot of what will move this pair might be the press conference, which is going to be after that announcement on January 23. The wide interest rate spread between the two central banks continues to favor the euro, and I think that is the play here.
A major risk for Japan in 2026 is the deflation trap in China, which is Japan's biggest trading partner, which could hurt Japanese exporters and pressure the Bank of Japan to remain dovish to support the economy. I believe this is an important factor.
Prime Minister Takaichi is facing pressure to manage the high cost of living. With her policies aiming to boost equities, the weak yen remains a double-edged sword that the government may eventually have to talk down if it crosses above the 186 yen level. The next catalyst, of course, will be the BOJ meeting. I do think that ultimately, we see buyers all the way down to about 178 yen, so I look at these dips as potential buying opportunities.
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