The Japanese Yen (JPY) is showing strength early in the European session on Tuesday, causing the USD/JPY pair to drop below the 155.00 level. This movement is influenced by the expected interest rate hike from the Bank of Japan (BoJ) and a general weakness in stock markets, which have helped the JPY perform well recently. Despite bullish feelings, Japan’s financial difficulties, linked to Prime Minister Sanae Takaichi’s spending initiatives, are limiting JPY gains. At the same time, the US Dollar (USD) is hovering around its lowest point in months due to predictions of future rate cuts by the Federal Reserve, which is boosting the JPY further.

Expectations for BoJ Rate Hike

Investors are anticipating a BoJ rate hike following Governor Kazuo Ueda’s comments about an improved economic and price outlook. Japanese business sentiment has hit a four-year high, supporting the idea of tighter BoJ policies, even as Japan’s manufacturing activity shows slower contraction. Mixed private surveys reflect varied economic activity in Japan, but the JPY continues to thrive as a safe-haven asset amid worries over stock valuations. Traders are considering the possibility of two more Fed rate cuts by 2026, keeping the USD in a weak position, especially with the USD Index close to its lows. Expectations regarding the Fed’s leadership and upcoming economic data are impacting USD/JPY trading strategies. Traders are waiting for US payroll and inflation figures for more insights into the economic landscape. If the USD/JPY drops below the 154.00 level, it may further decline, while resistance is seen near 155.40. A recovery would depend on surpassing crucial levels.

Divergent Monetary Policies

The difference between the Bank of Japan’s and the Federal Reserve’s policies is crucial at this time. There’s strong belief that the BoJ will raise interest rates on Friday, December 19th, while the Fed is likely to keep cutting rates in 2026. This policy shift is a major reason to expect a stronger yen soon. Recent data shows Japan’s core consumer price index has stayed above 2.5% for the fifth month in a row, giving the BoJ ample reason to tighten monetary policy. This marks a significant shift from the ultra-loose approach we’ve seen for years, which began to change in 2024. The rising business sentiment, now at a four-year peak, also supports a potential rate hike. Meanwhile, the US dollar appears weak. The most recent Nonfarm Payrolls report revealed a slowing US economy, with just 95,000 jobs added in October, strengthening expectations that the Fed will need to cut rates again next year. This has pushed the US Dollar Index (DXY) down to lows not seen since October 2025. For traders, the current environment favors strategies that benefit from a falling USD/JPY exchange rate. This could mean buying JPY call options or shorting USD/JPY futures, anticipating the pair will decline further. The key event to watch is the BoJ meeting on Friday, paired with the US inflation data on Thursday, which could bring volatility. From a technical standpoint, the failure of the pair to stay above the 155.00 mark is a bearish sign. If it breaks below the recent low of around 154.35, it could test the 154.00 support level, which we see as crucial. If this level is broken, it could trigger further declines. However, there are risks of a sudden bounce back if the BoJ is more cautious than expected or if US inflation reports higher than anticipated. A rise above the 156.00 area would challenge the bearish outlook, potentially leading to a quick unwinding of short positions and pushing the pair higher. Create your live VT Markets account and start trading now.

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