MUFG Bets on Lower EUR/JPY Amid French Bond Stress and BoJ Hikes

MUFG has issued a recommendation to short the EUR/JPY pair, suggesting an entry point at 177.50 with a target of 172.00 and a stop-loss at 181.50. The bank's outlook is shaped by two key factors: a weakening euro due to bond market stress in France and a strengthening yen supported by the Bank of Japan's potential rate hikes.

The euro's vulnerability stems from a widening spread between French and German bond yields, which has tightened financial conditions in the euro area. This reduces the pressure on the European Central Bank to raise interest rates aggressively. ECB President Christine Lagarde's comments on September 28 highlighted that higher long-term yields could slow growth and inflation, leading to a drop of around 30 basis points in hike pricing by mid-2027 from its peak.

On the yen side, MUFG anticipates another BoJ rate hike before the end of the year, which would narrow yield differentials with the euro area. Additionally, the yen could benefit from carry-trade unwinds if market volatility rises, as seen in the past week where the yen and Swiss franc were the best-performing G10 currencies.

The main risk to this trade is a stabilization in European bond markets. MUFG views the recent French bond sell-off as forced and overdone, suggesting that a calmer backdrop could prompt a reversal in the euro's fortunes. A move above 181.50 would invalidate the short EUR/JPY recommendation.