Japan’s National Consumer Price Index (CPI) without fresh food rose 2.4% year-on-year in December, matching expectations. This aligns with forecasts and follows the release of the Tokyo CPI earlier in the month. Interest rate decisions by the European Central Bank and the Federal Reserve have piqued market interest. These announcements are affecting currencies and commodities, creating shifts in global financial markets.

Currency And Commodity Market Activity

Market activities have shown fluctuations, with the EUR/USD pair staying near two-day highs around 1.1750. The GBP/USD pair is also gaining momentum, approaching a two-week high of about 1.3500. Gold prices have soared for the fifth consecutive day due to geopolitical tensions and possible monetary easing from the Federal Reserve. Meanwhile, Ripple (XRP) has stabilized above $1.90 after recent volatility. Ethereum’s Fusaka upgrade in December has led to lower fees and more transactions. Geopolitical events, such as US tariffs on NATO countries, are impacting markets significantly. These factors contribute to an uncertain environment in global finance. With Japan’s core inflation steady at 2.4% for December, the Bank of Japan’s choice to keep rates unchanged signals a reluctance to tighten policy further. This situation indicates that borrowing costs in yen will likely remain low for the near future.

Yen Carry Trade And Market Strategy

This policy difference makes the yen carry trade attractive, particularly with GBP/JPY at multi-year highs. This strategy involves using cheap yen to buy currencies with higher interest rates, and recent data supports this approach. Options traders might want to consider strategies that benefit from continued yen weakness, like buying call spreads for pairs such as EUR/JPY and USD/JPY. In the past, the Bank of Japan ended negative interest rates in 2025, but their current inaction suggests a pause in raising rates. This contrasts with the United States, where the Federal Funds Rate is about 3.75%, creating a profitable interest rate gap that keeps the yen weak against the dollar. However, we should be cautious of potential risks, especially with Governor Ueda’s upcoming press conference. Any unexpected hawkish comments could lead to a rapid unwinding of carry trades. Therefore, buying cheap, out-of-the-money puts on USD/JPY could act as a smart hedge against surprises in policy. Geopolitical tensions, like the recent US-NATO tariff discussions, may also cause sudden moves into the yen as a safe haven. The overall market environment of a weakening US dollar, driven by expectations of Federal Reserve easing, adds complexity but also creates opportunities. This “de-dollarization” trend is pushing capital toward assets like gold and possibly other currencies. For us, this means while the yen remains a stable source of leverage, it is not the only option for funding. Create your live VT Markets account and start trading now.

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