I have been following the euro-yen since the beginning of the year, and the volatility has been brutal. The pair moved more than 8 yen in just 4 months, going from 161.7 to a low of 155.6 in February and reaching a high of 164.2 in May. Everything depends on five key factors that continue to impact the market.

First, the Bank of Japan raised rates to 0.50% in January, the highest level since 2008, which immediately strengthened the yen. But the effect was temporary because European yields remained well above. Then came U.S. tariffs in February, which did spike demand for safe-haven assets and caused the euro-yen to plummet. The yen is a crisis currency; Japan is a major global creditor, so when an alarm sounds, everyone buys yen. Additionally, the yen market is huge and very liquid, the easiest Asian currency to acquire quickly during panic.

The ECB made three rate cuts between January and April, lowering from 4% to 2.25%. Each cut slowed the euro’s rebounds. Then in May, China implemented monetary stimulus, which boosted Asian stock markets and caused people to stop buying yen, so the euro-yen rose to 164.2.

Looking ahead, everything points to the BoJ continuing to raise rates up to 1% before October, while the ECB is likely to cut to 2% before the end of the year. This narrows the yield differential and supports a stronger yen. My forecast is that the euro-yen will fluctuate between 158 and 170 yen, with a gradual downward trend. When the market is calm, the pair should hold above 165. When a shock occurs, such as high inflation in the U.S. or a stock market correction, the yen regains its safe-haven role and the euro-yen drops to 158-160.

Technically, the daily chart shows a bullish bias, but indicators suggest the momentum is waning. The price is above the 161 moving average, confirming an upward trend, but the latest candles are narrow-bodied near the upper Bollinger Band. This indicates a lack of buying energy. The RSI is at 56 after touching 67 recently, showing bearish divergence. Immediate support is at 162.5, and below that at 161. Key resistance remains at 164.2.

For those looking to trade the euro-yen, buying on rebounds toward 165-170 makes sense, targeting 160-162 as the goal. But stops should be clearly set at 171. In the medium term, it’s prudent to accumulate in stages when the pair surpasses 163-164, thus averaging the price. If it hits 160-162 after BoJ hikes, it’s better to take at least some profits.

The main risks are that the BoJ halts its rate hikes if Japanese inflation subsides, or that European inflation resumes upward pressure. Also, a new round of tariffs between the U.S. and the EU could push the yen toward 158-160. But the structural bias has shifted in favor of the yen. For the first time in nearly two decades, carry trades are no longer a one-way street, suggesting a gradual downward trend for the euro-yen in the coming quarters.