The USD/JPY pair has fallen for the third day in a row, as the Japanese Yen strengthens against the US Dollar. The current exchange rate is about 150.35, down by 0.45% today. This decline is due to a general weakness in the US Dollar, driven by ongoing US-China trade tensions. The trade conflict between the US and China is impacting market sentiment. This is worsened by a lengthy US government shutdown. Additionally, expectations of further monetary easing by the Federal Reserve are putting pressure on the USD. Markets anticipate 25-basis-point rate cuts in October and December.

The US Dollar Index Drops

The US Dollar Index, which measures the Dollar’s value against six major currencies, is now at its lowest point since October 7, trading around 98.41. In Japan, political uncertainty has arisen after the collapse of the LDP-Komeito coalition, affecting the Yen’s strength. The International Monetary Fund (IMF) has suggested that the Bank of Japan (BoJ) adopt a gradual approach to policy normalization. It advises maintaining flexibility due to fragile global conditions and urges Japan to strengthen fiscal discipline to tackle rising debt concerns. Due to the weakness in the US Dollar, the immediate outlook for USD/JPY appears to favor further declines. The ongoing US government shutdown, now in its third week, together with trade tensions, has created a risk-off mentality. This situation makes the Japanese Yen, a traditional safe-haven currency, more appealing. The market’s expectations regarding Federal Reserve policy are a significant factor in the Dollar’s weakness. Fed funds futures now show an 85% chance of a 25-basis-point rate cut at the October 29 meeting. This comes after the September 2025 Core PCE inflation reading was reported at 2.1%, which is below the Fed’s previous hawkish forecasts. The US Dollar Index (DXY), reflecting this sentiment, fell below the 99.00 support level last week.

Derivative Trading Strategy

For derivative traders, buying USD/JPY put options is the main strategy to profit from further declines. We are considering strikes around the 148.50 level for November expiration, expecting a test of support that was seen during the August 2025 flash rally. Volatility is high, with the VIX index around 22. This makes options more expensive but could lead to larger profits if the downward trend continues. Looking back, we recall that the Japanese Ministry of Finance intervened sharply to weaken the Yen in late 2022 when the pair rose past 151. However, since the current trend is driven by the Yen’s strength amid global concerns, we think authorities are less likely to intervene against their currency’s safe-haven appeal. This could allow the Yen to strengthen further in the short term. However, the political uncertainty in Japan poses a significant risk that could cause a sudden reversal in USD/JPY. A stable government coalition led by Sanae Takaichi could boost domestic confidence and reduce the Yen’s haven status. To protect against a rapid rally, traders might consider buying inexpensive out-of-the-money call options or creating bearish put spreads to manage risk and limit potential losses. Create your live VT Markets account and start trading now.

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