The Japanese Yen (JPY) is holding steady against the US Dollar (USD) during Thursday’s North American session, following mixed reports on Purchasing Managers’ Index (PMI). The services PMI was better than expected at 53.5, while the manufacturing PMI fell short at 48.8.

Bank of Japan’s Policy Meeting

This data may help the Bank of Japan continue tightening its policies after successful trade talks with the US and the recent election results. The shrinking interest rate gap between the US and Japan is currently supporting the JPY. It is expected that the JPY will strengthen in the near term as the Bank of Japan’s meeting on July 31st approaches. The USD/JPY pair is predicted to weaken, possibly falling toward the 142.00 level. The information provided carries risks and is for informational purposes only, not investment advice. It is essential for readers to do their own research before making any investment decisions. All investments involve risk, including the risk of total loss, and individuals are responsible for their choices. With the mixed economic signals, we believe traders should explore strategies that benefit from a stronger Yen in the upcoming weeks. One approach could be buying put options on the USD/JPY pair, which would gain value if the pair’s price decreases as expected. These strategies limit risk while allowing for potential gains.

Rate Hike Expectations

The argument for a rate hike is strengthened by recent data showing Japan’s core inflation for May reached 2.5%, staying above the central bank’s 2% target for the 26th straight month. This ongoing inflation provides a strong reason for policymakers to continue normalizing their approach, which would likely strengthen the Yen. The narrowing interest rate difference is a crucial factor in our outlook. While the Bank of Japan may signal a rate hike during its meeting on July 31st, the U.S. Federal Reserve is expected to keep its rates steady, with futures markets indicating a high chance of a rate cut by September. This difference in policies is a key reason for a lower USD/JPY. Historically, the Yen has improved even at the mere suggestion of policy tightening from its central bank. For instance, ahead of the significant rate hike in March 2024, the currency experienced a brief but sharp rise against the dollar. We expect a similar or even more prolonged reaction this time if officials carry out another hike. Thus, setting up bearish positions before the late July meeting could be beneficial. We anticipate increased volatility, so using options could also be a viable strategy. A shift toward the 142.00 range indicates a major change, suggesting traders should plan their positions to take advantage of a longer-term trend rather than just a one-day event. Create your live VT Markets account and start trading now.

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