Recently, I noticed some interesting trading logic between the euro's trend and the Japanese yen, and I want to discuss the EUR/JPY cross pair with everyone.

Many people only focus on EUR/USD or USD/JPY, but actually, EUR/JPY is the hidden high-volatility trading pair. Why? Because there is a key interest rate differential game—The Bank of Japan has maintained an ultra-loose policy with interest rates near zero, while the European Central Bank is in a rate-hiking cycle. This interest rate gap becomes a breeding ground for arbitrage trading.

A few years ago, I saw an example: after the ECB announced rate hikes in 2023, EUR/JPY rose 1.1% within just a few hours, but EUR/USD only increased by 0.13%, a very clear difference. This is because the Japanese yen's interest rate remained unchanged, while euro interest rates rose, expanding the interest rate differential, and capital flowed into this trade.

Historically, the euro's trend has gone through several key moments. Around 2007, EUR/JPY approached a high of nearly 170, then after the 2008 financial crisis, market panic drove funds into the yen as a safe-haven currency, causing EUR/JPY to drop to 112. Later, the European debt crisis hit again, bringing it down to 94 in 2012. Further down the line, Japan's Abenomics began to flood the market with liquidity, and the euro started rebounding, briefly reaching 149.

The current situation is more complex. The ECB is indeed more hawkish than the Federal Reserve, even raising rates by 0.5% during the banking crisis, which supported the euro's trend. In the short term, EUR/JPY might still attempt higher levels, with the October 2022 level of 148.4 serving as an important reference.

But there is a long-term risk—Japan's new central bank governor might need to reassess the ultra-loose policy. Once the Bank of Japan starts raising interest rates or tightening policy, those arbitrage trades relying on the interest rate differential will be forced to close, causing the yen to appreciate rapidly. At that point, EUR/JPY could face a decade-long decline. This turning point warrants close attention.

From a technical perspective, indicators like RSI and MACD can help identify buy and sell signals. For example, when RSI breaks above 70 and then falls back (overbought conditions), or when MACD shows a death cross, these are often good short-term sell signals. But these are just short-term tools; the medium- and long-term logic still depends on central bank policies and inflation data.

Ultimately, the euro's trend still depends on economic data from Europe and Japan—GDP, CPI, unemployment rates, and other fundamentals. As long as Europe's economic data continues to improve and the Bank of Japan remains inactive, there is room for EUR/JPY to rise. Conversely, if Japanese inflation remains high and hawkish signals emerge from policymakers, it might be time to consider shorting.

The current market opportunities and risks are significant. The key is to closely follow central bank moves and economic data, and use technical indicators to confirm entry points rather than blindly following the trend.