The USD has weakened overall as Fed Chair Powell hinted at a more relaxed monetary policy, leading traders to expect a possible rate cut in September. Currently, there’s about an 85% chance of this cut, and a total of 54 basis points of easing is anticipated by the end of the year. Now, all eyes are on the US Non-Farm Payroll (NFP) report. Strong results could lower the chance of a September cut to 50% and create a more aggressive outlook. On the other hand, weak results might increase the chances of more rate cuts, including a potential third cut by year-end.

Japanese Yen and US Dollar Dynamics

The Japanese yen has gained strength due to these Fed expectations. More appreciation of the yen may depend on weak US data or high inflation in Japan. Increased government support could also raise inflation expectations. On the daily chart, USDJPY faced rejection at the 148.50 resistance level. Sellers are now focusing on the upward trendline around 145.50 for potential buying chances. The four-hour chart shows USDJPY has been moving sideways, while the one-hour chart indicates a slight upward trend, with buyers pushing towards resistance. Key upcoming events include US Consumer Confidence, US Jobless Claims, Tokyo CPI, and the US PCE price index. With the Fed’s dovish shift last Friday, we anticipate increased volatility in the USD/JPY pair. This uncertainty, especially ahead of the crucial Non-Farm Payroll (NFP) report next week, creates opportunities for options traders. Strategies such as straddles or strangles could be effective for capitalizing on significant price movements in either direction, without needing to predict the direction.

Market Analysis and Historical Context

The market currently expects an 85% chance of a rate cut in September; however, recent data tells a different story. In July 2025, we observed a solid jobs report with +260,000 jobs added, while Core PCE inflation has stubbornly stayed above the target at 2.8%. This data contradicts the Fed’s softer tone, suggesting that a strong NFP print next week could lead to a sharp increase in USD/JPY. Historically, we recall major market shifts in late 2023 when traders misjudged the timing of the Fed’s policy changes. A similar situation may be developing now, where dovish statements clash with strong economic data. Therefore, buying out-of-the-money USD/JPY call options with a short-term expiry may offer a cost-effective hedge against a hawkish surprise from the upcoming jobs report. Conversely, a weak NFP report would support the Fed’s dovish stance, likely pushing USD/JPY down toward the 145.50 trendline. In that case, purchasing put options or setting up bearish put spreads would help us benefit from the downward trend. The goal is to be in a position that profits from the initial market reaction to the data release. For Japan, Tokyo’s Core CPI remains steady at around 2.0%, which isn’t high enough to drive the Bank of Japan into aggressive action. This situation echoes the gradual policy normalization process we saw in 2024. For now, the main factor influencing this currency pair is the outlook for US interest rates. This week, we will closely monitor figures for US Consumer Confidence and the PCE price index. Any signs of weakening consumer confidence or slowing inflation could reinforce the case for a September rate cut, likely adding downward pressure on USD/JPY even before the important NFP data is released. Create your live VT Markets account and start trading now.

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