USD/JPY has dropped to about 155.05, mainly due to expectations of a US Federal Reserve rate cut and weak US economic data. The market is also awaiting the release of the US PCE Price Index data for September.

Impact of a Potential Rate Cut by the US Federal Reserve

There is a 90% chance the Fed will cut rates by a quarter-point next week, which will impact currency dynamics. The possibility of the Bank of Japan raising its rates from 0.5% to 0.75% supports the Yen. US employment data shows a decrease in Initial Jobless Claims, dropping to 191,000 for the week ending November 29, which is better than expected. The Yen’s value is closely linked to Japan’s economy, the Bank of Japan’s (BoJ) policies, bond yield differences, and market sentiment. While the BoJ’s previous loose monetary policy led to a weaker Yen, recent changes are providing support. Changes in central bank policies are narrowing the bond yield gap, which is also impacting the Yen’s value. Additionally, the Yen is popular during uncertain market conditions due to its safe-haven status. With the market expecting a Fed rate cut, the US PCE inflation data released today is crucial. Core PCE has been trending down from 2.8% in early 2025. If today’s figure is below the expected 2.4%, it will reinforce expectations for a dovish Fed. However, a surprise increase could cause a quick rally in the dollar, affecting current short positions.

Bank of Japan’s Role in Strengthening the Yen

The market has already priced in a 90% chance of a Fed rate cut from 4.0% next week, so the actual announcement may not significantly move the market. Instead, the focus will be on the Fed’s future guidance, which will shape the pace of upcoming cuts. Buying USD/JPY put options that expire after the meeting could be a smart strategy for those expecting a continued decline. The BoJ’s anticipated rate hike to 0.75% on December 18-19 is another factor boosting the Yen. This continues the gradual shift we’ve seen since the BoJ started moving away from its ultra-loose policies in 2024. The narrowing interest rate gap is a key factor, suggesting that maintaining short USD/JPY positions with futures contracts may be a strong approach. These two central bank meetings are likely to increase volatility for the USD/JPY pair. The pair has remained above 155, but the changing policies could break crucial support levels. Traders might consider using put option spreads targeting a move towards 152, which would help minimize initial costs in this volatile environment. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now