The USD/JPY pair ended about one point lower. This decline came despite minimal new information and comments from the Federal Reserve, as the likelihood of a Bank of Japan rate hike increased. Analysts predict that the JPY will increasingly impact the weakening of the USD in the coming months. Current interest rate forecasts indicate a potential decline of around 4% in the DXY index. Lower hedging costs should encourage investors in Europe and Japan to move away from the USD, especially amid ongoing concerns about US institutions and governance.

Suggested Trading Approach

A recommended trading strategy is to keep a short position on USD/JPY, targeting 142 with a stop loss above 152. This reflects the belief that the JPY can effectively counter USD weakness. We expect the Japanese Yen to lead in pushing the US dollar lower in the next few months. The USD/JPY movement has not yet fully aligned with economic signals, indicating further downward potential. Currently, the pair is just below 149, making this a good entry point for new short positions. The Bank of Japan is under pressure to take more decisive action, especially after last month’s national core CPI for July 2025 showed a rate of 2.8%, remaining stubbornly above their target. This follows strong wage growth reported from the Shunto negotiations earlier this year. These factors are raising market expectations for another rate hike before the end of the year, which would strengthen the yen.

Weakening Case For Holding Dollars

At the same time, the argument for holding dollars is weakening, especially after the unexpectedly low US retail sales report for July 2025. We continue to see a trend of diversifying away from the dollar, which sped up following the contentious debt ceiling negotiations in spring 2025. This shift supports a narrowing interest rate gap between the US and Japan. For derivatives traders, this outlook suggests buying JPY call options or USD put options to benefit from a declining USD/JPY exchange rate. With a clear target of 142, put options with strike prices around 145 or 144 provide a low-risk way to position for this decline. Selling out-of-the-money USD/JPY call options with strikes above the 152 stop level could also generate income, assuming the pair does not rally significantly. Create your live VT Markets account and start trading now.

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