Synopsis:

Société Générale highlights that elevated correlation between EUR/USD and USD/JPY has resulted in a tighter, more stable EUR/JPY trading range, and they expect this to persist as further USD weakness unfolds in H2.

Key Points:

• EUR/JPY Stuck in a Range:
  Unlike the more directional USD/JPY, EUR/JPY has been range-bound since the risk-off episode last August, showing muted volatility despite broader FX swings.

• Correlation Spike Post-Tariffs:
  Since the reciprocal tariff announcements in April, EUR/USD and USD/JPY have moved increasingly in tandem, compressing EUR/JPY volatility and tightening its range.

• USD in the Driver’s Seat:
  The US dollar is the dominant factor across major FX pairs currently, making EUR/JPY a derived cross-rate that reflects USD's behavior more than independent euro or yen dynamics.

• Outlook for H2:
  As USD weakness resumes in the second half of 2025, SocGen expects the high correlation between EUR/USD and USD/JPY to persist, further reinforcing the EUR/JPY range.

Conclusion:

EUR/JPY is likely to remain anchored in a narrow band in the near term, driven by the dominance of USD correlations. Investors should not expect breakout moves unless the USD’s influence on both legs of the cross diminishes.