The USD/JPY pair is currently below 158.90 due to the Bank of Japan’s strong position on future rate hikes. Governor Ueda confirmed that rates will go up as the economy improves, but are still below the neutral range of 1–2.5%. Analysts believe USD/JPY may drop to 140 within a year, influenced by expected rate hikes from the BOJ and easing from the Federal Reserve. The swaps curve suggests nearly 50 basis points of BOJ rate increases in the next twelve months, while a 75 basis point easing from the Fed is expected. The USD/JPY could align with one-year implied policy rate differentials, approaching 140.00. Insights come from various experts, giving a broad perspective on the current economic landscape.

Global Currency Dynamics

In other news, the GBP/USD has climbed over 1.3500 amid geopolitical worries and weak US data. The EUR/USD bounced back in the American session, trading around 1.1700 after disappointing US ISM PMI reports. Gold is back on track thanks to geopolitical tensions and weak US data, while Bitcoin and Ethereum are thriving amid ETF inflows despite ongoing geopolitical issues. The USD/JPY pair has fallen sharply from the 158.90 resistance identified back in 2025. Predictions of policy divergence were accurate, with the Bank of Japan sticking to its hawkish stance and the Federal Reserve starting its easing cycle. As of today, January 5, 2026, the pair is near 145.00, still above the long-term goal of 140.00. The Bank of Japan has kept its promises, with the policy rate now at 1.25% following a series of hikes last year. Meanwhile, the US Federal Reserve has lowered its benchmark rate to the 4.50-4.75% range. This change has greatly reduced the interest rate advantage that previously favored the dollar, explaining the significant drop from the highs of 2025. With this large decline, traders should think about strategies to benefit from further drops but with managed risk. We suggest buying USD/JPY put options with a strike price around 140.00 that expire in the next two to three months. This strategy allows for profit from a further decrease while limiting losses in case the pair unexpectedly rises.

Implications for Traders

However, it’s essential to monitor US economic data closely. The latest CPI reading of 3.1% shows that inflation remains a concern. This could slow the pace of future Fed rate cuts, offering some support for the dollar around the 142.00-144.00 range. For cautious traders, a put spread—buying a 142 put and selling a 138 put—may be a safer way to prepare for another downturn. We recall the significant volatility in the yen from 2022 to 2024, which set the stage for last year’s major directional shift. Recently, implied volatility has decreased while the pair has consolidated, making options cheaper than a few months ago. This provides a good opportunity to prepare for the next big move before volatility potentially picks up again. Create your live VT Markets account and start trading now.

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