Why EUR/JPY Refused to Fall in 2025

At this point last year, EUR/JPY appeared to be setting up for a clear bearish year ahead. The macro backdrop strongly favored that view. Europe’s economy was slowing, inflation pressures were easing, and markets were confident the ECB would deliver multiple rate cuts. Japan, meanwhile, looked ready to finally exit decades of ultra-loose monetary policy, with expectations building for meaningful Bank of Japan rate hikes.

That policy divergence is exactly what currency traders look for. Add to that expectations of heightened global volatility during a potential Trump presidency, and the yen appeared well-positioned to benefit from safe-haven demand. On paper, the case for a weaker EUR/JPY looked compelling.

Technicals reinforced that view. The yearly chart hinted at a shooting star near long-term resistance, while the monthly timeframe showed a loose head-and-shoulders structure developing. With both fundamentals and technicals aligned, a bearish outcome seemed more likely than not.

Why the Bearish Case Made Sense

From a macro perspective, the logic was straightforward. Europe faced deteriorating growth prospects and a prolonged easing cycle, while Japan appeared ready to normalize policy faster than at any point in the last three decades. Yield differentials were expected to compress sharply, favoring the yen.

Technically, price action suggested exhaustion. Long-term resistance was being tested, momentum appeared stretched, and potential reversal patterns were forming. It looked like a classic environment where macro expectations and chart structure were pointing in the same direction.

2025 Told a Different Story

Instead, EUR/JPY delivered one of its strongest performances in over a decade. The pair is up more than 13% year to date and nearly 20% from its February low, extending its rally for a sixth consecutive year. Price now sits just a few percent below its 1990 highs.

So what changed?

The core macro thesis was not entirely wrong, but the market impact was misjudged. The BOJ has only recently lifted rates to 0.75%, far below the aggressive hiking path traders had priced in a year earlier. At the same time, the ECB turned out to be less dovish than expected, providing unexpected support for the euro.

Positioning also played a role. Early in the year, long yen exposure surged as traders anticipated a hawkish BOJ pivot. When that pivot failed to materialize with sufficient force, those positions became vulnerable and were gradually unwound.

Trade Policy, Not Central Banks, Was the Turning Point

Perhaps the most underestimated factor was trade policy. Initial tariff threats triggered risk-off flows that supported the yen. However, the subsequent reversal of those tariffs proved far more powerful in restoring risk appetite than the original threats were in suppressing it.

As global sentiment improved, demand for the yen as a safe haven faded. That removed a critical pillar of the bearish EUR/JPY argument and allowed the cross to continue climbing despite expectations of policy convergence.

Current Technical Outlook

From a purely technical standpoint, the long-term trend remains firmly bullish. While EUR/JPY is clearly stretched relative to its 10- and 20-month moving averages and momentum indicators like RSI are overbought, these conditions alone do not signal a top.

Pullbacks are likely, especially if the BOJ delivers another rate hike, but price action does not yet support the case for a sustained bearish reversal. The more probable scenario remains periodic retracements within a broader uptrend rather than a full trend change.

After repeatedly underdelivering on hawkish expectations over the past year, there is little evidence to suggest the BOJ will materially alter this dynamic next year. Until price proves otherwise, EUR/JPY remains a reminder that markets can defy even the most logical setups when expectations move faster than reality.