USD/JPY dipped to about 155.60 in early trading on Friday after the US reported weaker job data. Initial jobless claims in the US rose to 236,000 last week, exceeding expectations of 220,000 and up from the previous week’s adjusted figure of 192,000. The Federal Reserve lowered the benchmark federal funds rate by 25 basis points to 3.5%-3.75%. Fed Chair Jerome Powell indicated that no future rate hikes are planned, and officials expect only one rate cut in the next year.

Japan’s Financial Situation

Concerns continue regarding Japan’s financial health due to significant spending plans aimed at boosting economic growth. This situation could influence the Japanese Yen and its value against the USD. Many eyes are on the Bank of Japan’s interest rate decision expected next week, with predictions of a potential increase to 0.75%. Factors affecting the Yen include the BoJ’s policies, bond yield differentials, and overall market sentiment. The Yen is often viewed as a safe-haven currency during uncertain times, and this historical view can increase its value when investors prefer stability. Recently, the Federal Reserve reduced its key interest rate to a range of 3.5%-3.75%, recognizing the slowing US economy. This was further confirmed by Thursday’s report, which revealed that Initial Jobless Claims surged to 236,000, marking a six-month high and significantly above the expected 220,000. These data points support the ongoing trend of a slowing US economy, which poses challenges for the US dollar.

Diverging Strategies

The main factor driving our strategy is the clear policy divergence between the US and Japan. While the Fed is easing its policies, the Bank of Japan is likely to raise its rate from 0.50% to 0.75% in its upcoming meeting. This shift follows Japan’s core inflation figures, which have consistently stayed above 3% for three months, putting pressure on the BoJ to tighten its policies. For traders dealing in derivatives, this situation heavily favors positioning for a lower USD/JPY exchange rate. We are looking into purchasing USD/JPY put options that expire in late January 2026 to take advantage of this anticipated change. The implied volatility for these options is already relatively high, indicating that the market expects a significant shift after the BoJ’s decision. It’s important to recall the history of this currency pair, especially the interventions by Japanese authorities back in 2024 when the rate surpassed 155. Although the current rate around 155.50 may typically raise intervention concerns, a rate hike from the BoJ could add fundamental support for the Yen, making market intervention less likely. The risk of intervention will mainly increase if the BoJ fails to implement the expected rate hike. The main risk to our bearish outlook for USD/JPY is the Japanese government’s fiscal policy. Prime Minister Takaichi’s extensive spending plans aim to boost growth but may weaken the Yen in the long run. If the BoJ raises rates but speaks cautiously about the future, the Yen’s strength could be temporary, making defined-risk option trades like put spreads a smart strategy. Create your live VT Markets account and start trading now.

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