Traders Are Staring at EUR/USD—But Forex’s Next Big Shock Is Elsewhere

The trading floor in London is quieter than most people would think at 2:17 a.m. A few workstations are still lit, with blue and green screens that display currency pairs that are slightly rising or falling. The EUR/USD fluctuates continuously, attracting attention as usual. The most traded currency pair in the world is still this one. However, it seems that the true threat isn’t where everyone is looking these days.

It’s common for forex traders to become fixated on well-known tales. For a long time, the euro versus the dollar has been the main event, attracting a lot of attention and conjecture. However, projections for 2026 indicate that the EUR/USD exchange rate may move sideways, trapped in a range influenced by comparable economic developments in the US and Europe. Ironically, stability can increase the vulnerability of markets in other places.

Because shocks rarely originate in areas where large crowds are present.

The Japanese Yen, a currency that quietly and almost predictably declined in value over the years, is gaining more and more attention. Monetary policy has started to change in Tokyo’s Marunouchi neighborhood, where salarymen still bustle past the Bank of Japan’s headquarters. Once frozen at zero, interest rates are now increasing. Slowly. However, enough to alter presumptions. It sounds like a subtle change. It isn’t.

For decades, traders sought greater returns in emerging markets, dollars, or euros by borrowing yen at low interest rates and investing the money elsewhere. The carry trade is the name given to this. It swelled into something gigantic at its height. Over a trillion dollars, according to some estimates, depended on the yen remaining weak.

That assumption now appears to be brittle. Traders believe that if this unwind picks up speed, it may cause abrupt currency swings that are much greater than anything the EUR/USD can produce. Some hedge funds have started to reposition, subtly lowering exposure, after observing the yen’s slight strengthening in recent months.

Uncomfortable reminders of what happens when carry trades fail are provided by history. The yen sharply increased in value in 2008 as international investors hurried to liquidate their holdings. It wasn’t a slow transition. It was aggressive. Such occurrences are not forgotten by markets. However, they do not account for the speed at which they can return.

In the meantime, currencies that are tied to commodities, such as the Australian dollar, are also becoming more popular. Australia’s economic outlook has improved due to rising iron ore and gold prices, which has also caused its currency to appreciate. Commodity booms, however, can suddenly turn around. And currencies frequently follow sooner than anyone anticipates when they do.

However, there is another type of tension associated with the yen. due to the fact that interest rates are involved.

Currency flows are driven by variations in interest rates among nations. Money naturally moved out of the yen when U.S. rates were higher and Japan’s rates were close to zero. However, the reasoning is reversed if that gap closes. Money returns home. Quickly.

How quickly Japan will raise rates is still unknown. Low inflation has long been a problem for the nation’s economy. Excessive speed could harm development. Inflation could rise if we move too slowly. There are repercussions for either route. Consequences are what currency markets thrive on.

Forex desks in Singapore and Hong Kong are busy late into the night as traders watch central bank speeches, bond auctions, and yield spreads. There are some hardly perceptible movements. However, even the slightest changes in expectations have the potential to ripple through trillions of dollars.

That is the forex paradox. Often, the biggest risks start as small changes.

Investors appear to think that if the Fed lowers interest rates later this year, the dollar itself might depreciate. The yen, the Norwegian krone, and even emerging-market currencies like the Indian rupee might all gain strength in such a scenario. However, belief is not proof. Changes in expectations can cause markets to violently reverse.

There was a strange silence recently as I stood behind a currency trader’s desk and watched price charts move across the screen. Don’t panic. No rush. Simply quiet assurance. It was a familiar calm.

Because just before a market surprises everyone, it usually appears the safest.

Headlines will continue to be dominated by the dollar and the euro. They always do. However, the next major shock might start in a less visible place—possibly in Tokyo, in a little-known area of the currency market, or in a position that is too crowded to unwind easily. Additionally, it most likely won’t make an announcement beforehand when it occurs.