The Japanese Yen has shown a slight recovery after hitting a two-week low against the US Dollar, thanks to strong data from Japan. In September, Japan’s service-sector inflation rose for the second month in a row to 3.0%. This increase has raised expectations for gradual interest rate hikes from the Bank of Japan. New Prime Minister Sanae Takaichi is expected to keep expanding spending policies, which might limit major changes in the Yen’s value. Economic uncertainties in the United States, along with the upcoming two-day meeting of the Bank of Japan, are creating a cautious atmosphere in the market. The US Federal Reserve’s decision this week could also affect the US Dollar’s strength in relation to the Yen.

Inflation And Interest Rates

Consumer inflation in Japan has been above the central bank’s 2% target for over three years, indicating a need for tighter policies. Meanwhile, US inflation in September rose by 0.3%, below expectations, suggesting the possibility of a rate cut by the Federal Reserve. The differing policies of the Federal Reserve and the Bank of Japan could support the Yen and restrict the USD/JPY’s upward movement. For USD/JPY, potential support is around 152.65, with resistance in the range of 153.25 to 154.80. The Bank of Japan’s Corporate Service Price Index also showed inflationary pressures, rising to 3% in September. With these opposing factors, we expect notable volatility in the USD/JPY pair this week. The Bank of Japan is feeling pressure to tighten its policies, especially with service-sector inflation at 3.0%. However, Prime Minister Takaichi’s focus on stimulus, along with a dovish Federal Reserve, creates conflicting trends. The 3.0% Corporate Service Price Index is significant, marking the highest corporate inflation since the price surges in 2024. This data strengthens the case for the Bank of Japan to move away from its long-term ultra-loose policy. Traders should prepare for the Bank of Japan to adopt a more hawkish stance this Thursday.

Market Strategy And Considerations

In the US, inflation has clearly softened from previous highs, with the latest annual CPI reading at 3.0%, which was below expectations. As a result, the derivatives markets are now pricing a more than 90% chance of a 25-basis-point rate cut from the Federal Reserve this Wednesday. This growing gap between the potentially hiking Bank of Japan and the cutting Federal Reserve is bearish for the USD/JPY. In the coming weeks, we should consider strategies that capitalize on expected volatility, such as buying straddles or strangles ahead of central bank meetings. A directional bias would be to favor JPY strength by buying USD/JPY put options or adopting cautious short positions. If the USD/JPY moves decisively below 152.00, we could see a shift toward the 151.00 level. However, we must also consider potential risks that might drive the currency pair upward. Any sign that Prime Minister Takaichi’s dovish policies might influence the Bank of Japan could weaken the Yen. Additionally, a finalized US-China trade deal that reduces safe-haven demand could also impact the Yen’s value. A rise above the 153.30 resistance level would indicate bullish momentum, targeting the 154.00 mark. Create your live VT Markets account and start trading now.

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