The USD/JPY is trading around 156.70 in early Asian trading, boosted by better-than-expected activity in the US services sector. The US Services PMI hit a 14-month high in December, rising to 54.4, surpassing expectations of 52.3. The Japanese Yen is weakening as demand for safe-haven currencies declines. The recent capture of Venezuelan President Nicolas Maduro had little effect on currency markets. Traders are now focusing on upcoming US jobless claims and employment data.

Federal Reserve and Bank of Japan Policies

The Federal Reserve’s cautious approach could affect the USD, with rate cuts expected in 2026. In contrast, the Bank of Japan’s moves toward policy normalization may support the JPY. BoJ Governor Kazuo Ueda mentioned possible rate hikes if the economy performs as expected. The Yen’s value is influenced by Japan’s economic conditions, the BoJ’s policies, differences in bond yields, and trader sentiment. The BoJ has eased its ultra-loose policy, which provides some backing for the Yen. It is also seen as a safe-haven currency, increasing in value during market turmoil. The BoJ intervenes to control the Yen’s value, impacted by the difference in bond yields between the US and Japan. This difference is likely to decrease as the BoJ continues to ease its monetary policy and other central banks reduce rates. With USD/JPY trading above 156.50, this rise appears temporary, mainly due to a strong US Services PMI report. This is the best reading we’ve had since late 2024, giving a brief boost to the dollar. However, this strength contradicts the broader trend we are monitoring.

Market Expectations and Trader Strategies

The key issue is the gap between current data and future Federal Reserve policies. Though the service sector appears strong, tools like the CME’s FedWatch show over a 70% chance of a rate cut by April. This expectation for lower US rates is likely to put downward pressure on the dollar. Meanwhile, the Bank of Japan is signaling a different direction. After a significant policy change in 2024, with Japanese core inflation staying above the 2% target for 18 months, the argument for further rate hikes is strengthening. This underlying support for the Yen should be considered. For traders, the current level near 156.70 might be a good point to consider bearish strategies in the next few weeks. Buying put options on USD/JPY allows us to prepare for a possible decline while limiting risk. We should pay close attention to the upcoming US jobs report, as a weak outcome could increase this downward pressure. Create your live VT Markets account and start trading now.

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