**JPY Faces Pressure, But Rate Hike Hopes Remain Strong** The US dollar may experience a rate cut from the Federal Reserve on Wednesday. This expectation comes from weaker US economic data, with a nearly 90% chance of a cut, according to the CME FedWatch Tool. Key factors affecting the Japanese Yen include Japan’s economic performance, Bank of Japan (BoJ) policies, and the bond yield differences between the US and Japan. The Yen is often a safe-haven investment, drawing in traders during uncertain times. Changes in BoJ policy, especially the slowing of its ultra-easy approach, impact the Yen’s value. Currently, the difference between US and Japanese bond yields favors the USD, though this gap is narrowing as policies evolve. **Opportunities in Monetary Policy Divergence** The initial reaction to Monday’s earthquake pushed USD/JPY toward 156.00, a typical response amid domestic uncertainty. We see this as a short-term reaction that might create an opportunity. Historically, significant domestic events in Japan, like the 2011 Tohoku earthquake, led to Yen strength as insurers and companies repatriated foreign assets for rebuilding. This temporary Yen weakness contrasts with the larger trend of differing policies between the US and Japan. With US core PCE inflation for November 2025 at 2.8%, markets predict a 90% chance of a rate cut from the Federal Reserve this Wednesday. On the other hand, Japan’s unexpected wage growth of 3.9% last month has raised expectations for a BoJ rate hike. For options traders, the rise above 155.50 might be a good point to enter positions that could gain from Yen strength. We are considering purchasing USD/JPY put options expiring in January 2026 to prepare for a price reversal. A strike price near 154.00 could offer a promising risk-reward opportunity once the focus shifts back to monetary policy. However, we need to be aware of the risk that the earthquake may lead the BoJ to postpone its planned rate hike to support the economy. After the Kobe earthquake in 1995, the BoJ cut rates a few months later to boost activity. Even though today’s inflation situation is quite different, any dovish comments from Governor Ueda in his upcoming speech could undermine the case for a stronger Yen. This uncertainty is evident in the options market, where one-week implied volatility for USD/JPY has jumped to over 16%, a level not seen since late 2024 when interventions occurred. This suggests options are currently expensive, but it also indicates the market is preparing for significant price swings. Given this high volatility, defined-risk strategies like put spreads may be wiser than simply buying options. Create your live VT Markets account and start trading now.

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