The Japanese Yen (JPY) slid against the US Dollar (USD) during the Asian session, nearing its lowest point in nine months. Japan’s economy shrank by 0.4% from July to September, marking its first contraction in six quarters. The Gross Domestic Product (GDP) fell 1.8% compared to last year. Prime Minister Sanae Takaichi’s fiscal stimulus plan and support for low interest rates have lowered expectations for a rate hike by the Bank of Japan. There is speculation that Japanese authorities may step in to stop the Yen from falling further. A weak risk appetite has limited how much the Yen can lose, while the USD’s gains are curtailed due to worries about a potential US government shutdown. Japan’s Finance and Economy Ministers are worried about how a weak Yen affects import costs and inflation, which leads to cautious trading against the Yen.

Diplomatic Tensions With China

Japan’s stimulus measures come amid rising diplomatic tensions with China over Taiwan, impacting investment confidence. Traders are watching for the delayed US Nonfarm Payrolls report and developments from the Federal Reserve. The USD/JPY pair is finding support near the 153.60 level, with possible resistance around 155.00. Since 2013, the Bank of Japan has maintained an ultra-loose monetary policy but recently changed its approach, which previously contributed to the Yen’s decline. The weaker Yen, combined with high energy prices worldwide, has pushed Japan’s inflation above the Bank of Japan’s 2% target. Currently, Japan’s economy shows signs of vulnerability, contracting for the first time in six quarters. With GDP down 1.8% year-on-year, it’s less likely that the Bank of Japan will raise interest rates soon. This hesitation keeps the Yen weak and holds the USD/JPY pair above the 154.00 mark. However, shorting the Yen might be risky now. Japanese officials are closely monitoring currency movements, and the Finance Minister has emphasized the need for urgency. We recall that authorities intervened to buy Yen in 2022 when it surpassed 150, indicating that there is now a significant risk of direct intervention to boost the currency.

Challenges For The US Dollar

On the other hand, the US Dollar faces difficulties amid fears of a slowing American economy following the longest government shutdown in history. Recent data show slower hiring, and markets now see nearly a 50% chance of a Federal Reserve rate cut in early 2026. This sentiment may limit the US dollar’s upside in the upcoming weeks. This situation creates opportunities in the options market to trade volatility. Even though the Bank of Japan shifted away from its ultra-loose policy in March 2024, its hesitation to tighten rates further creates a significant interest rate gap with the US. This suggests that buying call options on USD/JPY could be a good strategy to profit from potential increases while managing risk. Geopolitical tensions between Japan and China over Taiwan also add uncertainty, which could lead to a spike in demand for the safe-haven Yen. To hedge against a sudden drop, traders holding long USD/JPY positions should consider purchasing put options. These safeguards are crucial in a market where political news can change sentiment rapidly. From a technical viewpoint, the 155.00 level is an important psychological barrier to monitor. A strong move above this level could signal a buying opportunity, targeting the 156.00 area. On the other hand, a drop below the key 153.00 support level would suggest that upward momentum has stalled, indicating a possible short position initiation. Create your live VT Markets account and start trading now.

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