The Japanese Yen has been under pressure during the early European trading hours on Monday, mainly due to a few key factors. Many are speculating that the Bank of Japan might delay interest rate hikes because of political uncertainties at home and a favorable global investment landscape.

US Federal Reserve Speculations

Markets expect the US Federal Reserve to cut borrowing costs twice more before the year ends. This, along with a possible extension of the US government shutdown, has slowed the US Dollar’s upward movement. Rising trade tensions between the US and China might also influence future diplomatic meetings, thereby affecting market sentiment. In Japan, political changes are occurring, as the Komeito party has ended its alliance with the ruling Liberal Democratic Party. This shift could impact Sanae Takaichi’s leadership goals and increase volatility for the Japanese Yen. Additionally, US tariff threats and China’s reactions have added more unpredictability to global trade talks, which could influence currency movements. Technical analysis shows that the USD/JPY pair is holding steady, even though it trades below important Fibonacci levels. Despite some encouraging indicators, it’s wise to be cautious, as there is potential market support at lower levels. Resistance and support levels signal that the currency pair might experience increased volatility in the future. The Japanese Yen remains weak due to political uncertainty and a general risk-on attitude in the markets. After the Bank of Japan ended negative interest rates in 2024, traders now believe further rate hikes won’t happen this year. This underlying weakness indicates that the USD/JPY pair may continue to rise.

Caution for Traders

Traders should be careful about betting too heavily against the Yen, as the risk of government intervention is significant. Many recall the large-scale interventions by the Ministry of Finance in spring 2024 when the pair exceeded 160, costing around 9.8 trillion yen to support the currency. This history likely tempers aggressive buying, even while the pair trades above 152. On the flip side, the US Dollar is struggling to gain strength because of the ongoing government shutdown and expectations for more rate cuts. The growing belief that the Federal Reserve might make two more cuts before the end of 2025 is dampening the dollar’s attractiveness. Recent data from the Bureau of Labor Statistics showed a slight rise in weekly jobless claims to 215,000, reinforcing the idea that the economy is slowing, prompting potential Fed action. This back-and-forth dynamic suggests that implied volatility in USD/JPY options may be underestimated. Traders should consider strategies that benefit from a significant price movement in either direction, such as buying long straddles. This method lets us take advantage of potential spikes, whether from unexpected intervention pushing the pair toward 150 or a risk-on rally driving it above 153. For those with a more targeted approach, the Yen’s current weakness appears to be the main factor influencing movements. We could look into buying call options or setting up bull call spreads on USD/JPY, aiming for a rebound to the 153.30 highs seen last week. Using options instead of trading the spot market helps define our risks, which is crucial given the constant threat of sudden intervention. Create your live VT Markets account and start trading now.

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