The Japanese Yen is gaining against a weaker US Dollar as the European trading session begins. Minutes from the Bank of Japan’s September meeting hint at a possible interest rate increase and talk of government action to support the Yen.

Barriers To Yen Gains

Japan’s new Prime Minister plans to boost spending without tightening policies, which poses a challenge for the Yen. The US Dollar has stayed strong since May due to the Federal Reserve’s actions, limiting how much the USD/JPY pair can drop. The BoJ minutes show a careful stance due to inflation worries, while Japan’s top currency official points out that Yen movements are straying from basics. Sanae Takaichi backs fiscal spending, which reduces aggressive bets on the Yen. ADP reported a rise of 42,000 jobs in the US private sector for October. Even with solid ISM Non-Manufacturing PMI data, the ongoing US government shutdown is affecting the USD, putting pressure on the USD/JPY pair. The USD/JPY pair faces resistance near 154.40-154.45, while support levels hover around 153.65 and 153.00-152.95. Further drops could push it toward the 152.55-152.50 zone or lower.

Federal Reserve Impact

The Federal Reserve adjusts interest rates to manage inflation and employment, influencing the USD. They use Quantitative Easing and Tightening to ensure economic stability, affecting the currency’s strength. The ongoing tension between the Bank of Japan and the Federal Reserve is still a key factor for USD/JPY, similar to the past. The pair is currently trading around 158.20, raising speculation of direct intervention from Japanese officials. Concerns about Yen weakness have been present even when the pair was at lower levels. Discussions about a potential Bank of Japan rate hike eventually led to action, resulting in a current policy rate of 0.25%. However, the slow pace of these hikes—only three small increases since early 2024—has not significantly changed the wide interest rate gap with the US. This is why the Yen remains under pressure even after the BoJ left its negative interest rate policy over a year ago. On the US side, the previously aggressive Fed stance has softened as 2025 approaches. With the Fed funds rate at 4.75% and US unemployment rising to 4.2%, the market is now anticipating rate cuts rather than hikes. The risk of economic instability from political conflicts, like the government shutdown affecting the outlook before, remains a concern for Dollar bulls. For derivative traders, this situation suggests focusing on volatility and downside protection for the USD/JPY pair. Buying put options can safeguard against a significant drop, possibly caused by Bank of Japan intervention or unexpected dovish moves from the Fed. Selling out-of-the-money call options could generate income, but it carries risk if the Yen falls below the 160 level. The psychological level of 160 now serves as a significant barrier, more challenging than the 155-156 range monitored in previous years. A clear drop below 157 could signal a deeper pullback, prompting traders to target the 155 level as the next major support zone. This makes the current range especially sensitive to central bank announcements in the coming weeks. Create your live VT Markets account and start trading now.

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