The Japanese Yen is slightly stronger against a weaker US Dollar during the European session, remaining near a one-year low. Geopolitical tensions give support to the Yen, but its gains are limited due to possible early elections in Japan, issues with China, and uncertainty around the Bank of Japan’s (BoJ) rate hikes. In the US, President Trump is considering military action in Iran, escalating global tensions alongside the ongoing Russia-Ukraine conflict. Additionally, concerns about the independence of the US Federal Reserve are causing the Dollar to weaken. The Nonfarm Payrolls report shows a 50K rise in December, falling short of expectations. The Unemployment Rate has dropped to 4.4%, leading to speculation about a possible Fed rate cut in the upcoming meeting.

The Bank Of Japan’s Stance

The Bank of Japan remains open to further tightening. Governor Ueda indicates that more rate hikes could happen if economic conditions meet forecasts. The 200-period Simple Moving Average on the USD/JPY chart indicates growing demand, but an overbought Relative Strength Index may limit short-term gains. Market participants are waiting for US inflation data to determine future movements in the USD/JPY pair. In “risk-off” scenarios, safe-haven currencies like the US Dollar, Japanese Yen, and Swiss Franc usually strengthen. The US Dollar gains due to its status as the world’s reserve currency; the Yen is supported by domestic investors holding Japanese government bonds; and the Swiss Franc benefits from strict banking regulations. These patterns reflect market sentiment during uncertain times. Looking back to 2025, the Yen gained temporary support amid geopolitical risks, while the Dollar weakened due to Fed independence concerns and disappointing payroll data. However, the strong Dollar trend has returned, with USD/JPY trading around 162.50. The divergence in monetary policies that began then has become a key market driver. The Bank of Japan followed through on Governor Ueda’s hawkish indications, raising its policy rate to 0.10% in the latter half of 2025. This move was expected and has not significantly halted the Yen’s decline, especially since recent data shows Japan’s GDP for Q4 2025 was nearly flat. This suggests that further BoJ rate hikes will be slow, reducing the Yen’s attractiveness.

Fed’s Renewed Policy Narrative

While the Fed implemented some rate cuts in 2025 as anticipated, the narrative has changed this month. The latest US CPI data shows inflation stubbornly above 3%, prompting the market to reduce expectations for aggressive Fed easing. This ongoing policy divergence favors the US Dollar over the Japanese Yen. In the coming weeks, the current environment makes long USD/JPY positions via derivatives appealing, such as buying call options to bet on further gains. The interest rate differential, now over 5%, offers a significant positive carry for those holding the pair. Traders should consider selling out-of-the-money JPY call/USD put options to earn premium, reflecting the view that a major Yen strengthening is unlikely. The technical analysis from 2025 indicated an overbought RSI, leading to some short-term consolidation, but the pair eventually trended upwards. We are now monitoring longer-term moving averages, and any dips towards the daily 50-day SMA could create buying opportunities. Using derivative strategies like bull call spreads can provide a defined-risk method to position for a gradual upward trend in the USD/JPY. Create your live VT Markets account and start trading now.

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