The EUR/JPY currency pair offers savvy day traders the volatility and liquidity needed to profit in the forex space. However, the pair can swing in reaction to Eurozone debt crisis announcements, economic data releases, policy decisions, and trends in market sentiment. So, this page will cover everything you need to know to start day trading the EUR/JPY pair, from its history, benefits and drawbacks, to charts, strategy, technical analysis, and trading hours.
EUR/JPY Trading Brokers
Breaking Down ‘EUR/JPY’
Firstly, what does the EUR/JPY mean? It is simply the forex quote for the Euro vs Japanese yen exchange rate. So the Euro is the base currency, whilst the yen is the counter currency.
Why Day Trade EUR/JPY?
With so many daily forex options out there, why should you focus your attention on the EUR/JPY currency pair in particular?
- Stock indicator – Unsurprisingly, the pair is considered a leading indicator for stocks.
- Volatility – The EUR/JPY pair also displays high levels of volatility. As a result, there is plenty of pip movement and opportunities to profit from steep price fluctuations.
- Relative predictability – Whilst some currency pairings are well-known for misleading signals, the direction of the EUR/JPY is often more predictable. Consequently, EUR/JPY signals and reversals can be easier to spot than in other forex pairs.
- Competitive spreads – You will also find this is a currency pair that comes with relatively low spreads, which could all add up to greater end-of-day profits.
- Diverse trading vehicles – As a liquid, cash-rich pair, day traders can benefit from a number of different trading vehicles, including ETF, futures and options. As a result, this could mean greater opportunities to generate profits.
- Availability of resources – In many ways, technical analysis today is easier than ever before. This is because you can analyse graphs and candlestick charts with customised indicators and sophisticated trading tools. Furthermore, conducting Elliott wave analysis is more straightforward, for example. You also have access to knowledge rich forums where both daily and long-term forecasts will be offered.
Despite the benefits, there are also some drawbacks to trading with the EUR/JPY pair:
- Dangers of leverage – Whilst leverage can increase potential profits, it can also amplify losses. As a result, without an effective risk and money management system in place, you can quickly lose significant capital.
- Education investment – The EUR/JPY pair is forever responding to market conditions due to geopolitical events. So, whether you should be buying or selling on the EUR/JPY can be determined to an extent by looking at historical data and key facts surrounding the euro. As a result, to stay in the black you need to be continuously learning and utilising the resources around you.
- Automated competition – Even with attractive bid-ask spreads and competitive forward rates, today you are competing against sophisticated trading algorithms. So, even with a historical data download, plus hourly and monthly charts, you also have to compete with bots that enter and exit positions automatically when pre-determined criteria have been met.
Influences on Movement
There is a whole host of factors to consider in the EUR/JPY relationship. However, the most important are as follows:
- Japanese imports vs exports – Japan is a global player on the exporting stage. So, how successful its trading is currently will always make a difference to EUR/JPY exchange rates and prices.
- Economic strength – Also, the EUR/JPY currency pair is to some extent a reflection of the current relationship between the Eurozone and the Japanese economy. Hence economic uncertainty and instability in Europe will lead to the Yen strengthening.
- Price of energy commodities – In recent years, Japan has been the fourth largest importer of crude oil and the second biggest importer of natural gas. In fact, it relies hugely on these importations to satisfy domestic energy requirements. The relationship between the yen and energy pricing, therefore, will have a direct impact on EUR/JPY rates.
- Natural disasters – It’s also worth noting, Japan is so big that natural disasters can have a substantial effect on the Japanese economy.
- Government intervention – Currently, the Japanese government is implementing a number of economic initiatives to strengthen the economy. As a result, day traders need to keep an eye on Bank of Japan (BoJ) interest rates and government announcements, as all can influence the value of the yen.
- Bond-buying program – In recent years, information about what BoJ is doing in relation to the Japanese bond-buying program will lead to price movement. Furthermore, this Quantitative easing (QE) measure is the most aggressive in the world. In fact, it is bigger than the one found in the US, despite the Japanese economy being half the size.
- Slow yen growth – For a long time, the Japanese yen has remained a slow-growing currency. This is also a situation that doesn’t currently look like it will change.
Events that suggest instability within the EU will swiftly be felt in the EUR/JPY live exchange rate. For example, political disagreements as to the future of the euro will cause the euro to weaken vs the yen. In particular, stay tuned into the following economic data releases from Europe:
- European Central Bank (ECB) meetings held eight times each year.
- Purchasing Managers Indexes (PMI’s) are also released each month and report on the strength of each sector.
- Consumer Price Index (CPI), or inflation must be kept below or close to 3% by the ECB. Movement in this could well cause the bank to take action. Therefore, day traders should expect volatility when the CPI is due to be released.
GDP & Employment Rates
Both bits of information will reflect respective economic strength and may lead to changes in EUR/JPY valuations.
The success of Japan’s Nikkei 225 stock market index and major EU indices, such as the Dax 30 and Cac 40, may also lead to changes in the currency pairing.
So, whatever your EUR/JPY intraday trading system, you must consider many of the fundamental factors outlined above. This is because the latest current rates are susceptible to change from every angle, so don’t get complacent.
Unlike majors, the EUR/JPY does not have US dollar as a component, making it a cross. Often cross pairs move differently to major pairs. Yet whilst crosses may not be formed with the US dollar, they are still to some extent dependant on its movement.
So, the EUR/JPY will move in relation to differences in the EUR/USD and USD/JPY pairs. This is because the two majors are considered negatively correlated.
- Positive correlation – This takes place when pairs react in line with each other. GBP/USD, AUD/USD, and EUR/USD are three such popular examples. Also, note the US dollar is the counter currency.
- Negative correlation – This occurs when currency pairs move in the opposite direction.This is because the US dollar is the base currency. EUR/JPY, USD/CHF, and USD/JPY are three common examples.
Despite the EUR/JPY currency pair being mostly negatively correlated, it is not 100% so. As a result, there is room for some movement. This is partly because the JPY pairs are dependant on what happens in equity markets.
The solution – calculate the correlation yourself.
Being the correlation calculator yourself may put you in a stronger position to predict whether the EUR/JPY will go up or down. In addition, it’s relatively straightforward. All you need is an Excel spreadsheet and to understand that correlation is a statistical measure, between -1 and +1.
Once your spreadsheet is up, do the following:
1. Enter price data from your currency pairs, for example, EUR/JPY.
2. Then create a column for each pair.
3. Fill in the columns with past daily prices for the time period you are interested in.
4. In an empty box at the bottom, type =CORREL.
5. Once you highlight all the data in a column you will get a range of cells in the formula box. Then type a comma.
6. Now repeat steps 3 to 5 for the remaining currency.
7. Simply close the formula. It should then look like =CORREL (A1: A25, B1: B25).
Finally, the total figure you are given is the correlation between the EUR/JPY currency pair.
Having this information to hand may enhance your forex outlook and allow you to make more accurate determinations on your realtime chart.
EUR/JPY Day Trading Strategy
Regardless of whether you opt for a scalping strategy with an EA (expert advisor) or a breakout system, there are several useful considerations below your strategy may benefit from.
Successful EUR/JPY day trading hinges on timing. In particular, you want the optimum levels of volume and volatility. Therefore, a crucial part of your strategy is choosing the right time to trade.
Too many traders fall into the trap of thinking more trading always leads to greater profits. Unfortunately, just because you can trade FX 24/7, doesn’t mean you should. So, when is the best time to trade?
You will often find that once liquidity returns to the forex market after the weekend, Asian markets are the first to pick up the pace. Trading is reflected by the Tokyo capital market, normally open from 00:00 to 06:00 GMT. As a result, this is when activity in the EUR/JPY pair is likely to start gathering momentum.
Before the Asian session closes, the European session comes to life and keeps trading activity high. A number of major financial markets are in play here, however, London reigns supreme.
You will often see the greatest activity in the European session for the EUR/JPY pair between 07:30 to 15:30 GMT. Having said that, other capital markets, such as Germany and France help to elongate that period somewhat, giving you an additional profitable half an hour at the beginning and end of the trading day.
But be warned, expectations for today will often quickly change when the European session begins.
Rise & Shine
Your daily forex analysis needs to start early. So, if you want to be able to spot bearish trends and opportunities to short, your target should be to start preparing at least an hour before the opening bell rings.
Just like other forex pairings, the EUR/JPY is not free from risk. Hence volatility can bring with it false signals and traders can quickly find themselves in the red if they are not careful. So, this makes it all the more important to implement an effective risk management system.
Many traders suggest risking no more than 1-2% of your account balance on a single trade. Therefore, if you have $50,000 in your trading account, you wouldn’t risk more than $500-$1000 on a single trade. This will keep you in the trading game for as long as possible, whilst also minimising the damage from substantial losses.
Regardless of whether you focus on daily pivot points, average daily range, or news announcements, timing and an effective risk strategy could make all the difference to your end of day profits.
Some prefer to day trade the EUR/JPY using the news. This is because euro and yen prices and rates shift in response to major news announcements. You will also find some news resources offer closing prices, latest analysis, prognosis, and recommendations. So success rests on anticipating the impact of breaking news and trading accordingly.
Some of the most popular sources include:
- Forex Factory
- Yahoo Finance
- Google Finance
One simple EUR/JPY forex trading strategy relies on identifying and capitalising on trend lines. This fundamental technical analysis could provide the crucial data and information you need to assert a competitive edge.
Support and resistance levels simply reflect supply and demand when traders enter and exit their positions, hence telling you when to buy and sell.
For example, if you brought up a 1-hour chart and you could see a few price peaks, you can connect the points and draw a trendline. All you need is at least two common points. Once you have connected the points, you have your resistance line.
In a downtrend, resistance acts as an upper price limit, which can form the foundation for your trading technique.
One obvious advantage to utilising trendlines is that it is straightforward to repeat trades. With the downtrend scenario, you can enter sell positions whenever the price approaches your resistance level. Also, you can select a chart that suits your trading style, from 15-minute charts to 4-hour charts.
So, once you have your EUR/JPY trendline, you want to enter the market in the direction of the trend. Returning to the declining example, you would want to sell towards lower lows.
Identifying entry points is now simple. This is because you can place sell entries each time price touches your resistance. After you have planned your entry, you can employ a stop-loss to limit your risk. For example, if the EUR/JPY is again declining, you would place a stop loss above your current trendline.
So now you know if the price exceeds your line, you should exit your trade. A downtrend relies on the formation of lower lows. Therefore, you can place limits underneath a previous low to generate an advantageous risk/reward ratio.
Early EUR/JPY History
Before you head online and start live chart investing, having an in-depth understanding of the historical relationship between the EUR/JPY will help.
The Japanese yen, which quite literally means ‘circle’ or ‘round object’ was first introduced in 1871 by the Meiji government, in an attempt to replace the unstable Edo period. Before this time, no standard currency exchange existed.
In fact, the hope was to join the gold standard of currency, which was indeed realised with the 1871 Currency Act. Consequently, the stable monetary exchange soon became a floating currency exchange and the yen a floating currency.
A noteworthy turning point for the yen came with World War II, where it lost much of its value. As a result, the yen was equivalent to one US dollar for the thirty-two years following 1949.
Recent EUR/JPY History
The EUR/JPY relationship blossomed to some extent, by the increased trading activity between Japan and the EU. Consequently, Japan is currently the fifth largest global economy and much of their trade is driven by export to the EU.
Having said that, between 2005 and 2015, political disagreements and tariffs saw the EU consistently run a negative trade balance with Japan. In fact, from 2005 to 2011, the trading relationship generated an average annual negative balance of £28,741 million to the EU.
However, to try and tackle this one-sided trade balance, both the EU and Japan have looked to promote the following measures:
- Pursuit of a comprehensive Free Trade Agreement (FTA)
- Development of the EU-Japan Business Roundtable (BRT)
- Participation in the Asia-Europe Meeting (ASEM)
2008 Global Financial Crisis
The EUR/JPY relationship has also been turbulent since the introduction of the euro in 1999. In fact, one of the most influential events was the 2008 global financial crisis. As a result, the EUR/JPY fell from 169.78 in July 2008 to a low of 115.00 in February 2009.
The EUR/JPY downtrend resulted in a 30% appreciation of the JPY. Therefore, it’s the ideal example to illustrate why traders and investors have traditionally seen the Japanese yen as a safe haven currency. It also appears that Japan’s economy is relatively isolated from global economic crises, attracting investment during these times.
In these periods both domestic and international investors choose to retain their capital in the yen, resulting in the yen strengthening against other currencies, such as the euro.
EUR/JPY rates and prices are also affected by significant political decisions. For example, in 2012, Japanese prime minister Shinzo Abe introduced his “Abenomics” plan to bolster the economy.
The result – long-lasting devaluation of the yen against the euro. Hence in the wake of his election, investors instead chose to hold euros over yen. As a result, the EUR/JPY rose from 98.75 on July 1, 2012, to a high of 118.82 on January 1, 2013.
So, switched on day traders will keep abreast of such political trends and announcements to allow them to make more accurate predictions and forecasts on price fluctuations.
Role of Euro
Now you understand some of the key events in the EUR/JPY timeline. However, you also need to get to grips with the role of the euro to make future rate predictions and forecasts.
The European Union (EU) is the largest economic region on the planet. As a result, it boasts a GDP in excess of $14 trillion, and the bulk of the economy is centred around the service industry and manufacturing. Usually, the euro strengthens in line with EU economic activity. For example, when the economy slows, the euro will normally weaken.
Disagreements between governments on the future of the EU and economic policies will most probably result in a weakening of the euro against the Japenese yen. It’s also worth noting that many traders who focus on long-term charts forget the importance of staying tuned into the latest EU news announcements.
Role of Japanese Yen
The Japanese yen is currently the third most widely traded currency after the US dollar and euro. In fact, its stability within the forex space is evidenced by the fact it is the world’s fourth reserve currency, after the US dollar, Euro, and Great British pound.
Half of the Japanese economy is built on exports. Furthermore, Japan is home to some huge companies, from Sony to Honda and Nissan. However, in an attempt to make Japanese companies competitive abroad, Japan takes measures to keep the yen relatively weak. Consequently, this encourages overseas sales.
However, Japan is somewhat reliant on China as a trading partner, especially since industries such as shipbuilding have moved to China and South Korea.
In addition, despite economic strength in some areas, Japan has run into some problems in recent years, particularly since the collapse of its real estate bubble.
Between 2001 and 2011, growth barely exceeded 2%. This is probably because low fertility rates plus an ageing workforce, taxation and consumption have been persistent problems. As a result, the BoJ has looked to combat these issues with low-interest rates, in an attempt to stimulate economic growth.
So, aspiring EUR/JPY day traders will need to look at these underlying forces that drive the strength of the yen. Some of the most especially relevant data reports to pay attention to include:
- The Tankan Report
- Tokyo Area CPI
- BoJ interest rate decisions
Unfortunately, EUR/JPY yearly charts won’t always tell you everything you need to know. Furthermore, weekly forecasts and forex predictions often hinge on the results of these reports.
The EUR/JPY currency pair promises both volume and volatility. Yet to profit in this competitive marketplace you will need to keep abreast of developments in both Japan and the EU. Consequently, there are a wealth of economic data reports at your disposal.
You will also need to remember to be up early and ready with your live streaming chart to make forecasts for today. If you can do the above and utilise the resources mentioned, your journey to joining the likes of successful forex traders, such as Stanley Druckenmiller and Bill Lipschutz may be just beginning.
If you would like further guidance, see our forex page.