In Asia, Friday morning trading saw stock markets climb, leading to a lower demand for safe-haven assets. The Corporate Goods Price Index indicates that inflation in Japan is above historic levels. This aligns with BoJ Governor Kazuo Ueda’s optimism about economic and price trends, suggesting possible policy changes from the Bank of Japan (BoJ) before their meeting on December 18.

Technical Analysis

From a technical standpoint, the USD/JPY faces resistance around the 156.00 mark. If this level is broken, it could rise to 158.00. On the other hand, if it drops below 155.00, the pair might fall to the monthly low of 154.35. A risk-on market typically boosts stock and commodity prices while negatively impacting safe-haven assets like the Yen, which usually performs better in risk-off scenarios. The Japanese Yen is weakening due to a risk-on sentiment in the market and worries about government spending. However, this decline is limited because many anticipate that the BoJ will raise interest rates next week. This creates a tense atmosphere for traders dealing with the USD/JPY currency pair. The BoJ meeting on December 18 is the most significant event on the horizon. A decision to increase rates would mark a major move in the ongoing normalization process that started in 2024, which the market largely expects. Therefore, we think that any notable strength in the USD/JPY pair is unlikely before this announcement.

Market Implications

This hawkish outlook is supported by recent data, showing Japan’s core inflation for November at 2.8%. This figure has remained above the BoJ’s 2% target for over a year, giving the central bank a strong reason to tighten its policy. In this context, strategies that profit from a stronger Yen, like buying JPY call options, become more appealing. In contrast, the US Dollar remains weak after the Federal Reserve cut interest rates this past Wednesday. Fed Chair Powell’s comments about risks to the US job market reinforce our belief that more rate cuts may come in 2026. This difference between a tightening BoJ and an easing Fed suggests a potential long-term downtrend for USD/JPY. Recent economic data from the US supports this view, with weekly initial jobless claims rising to 235,000. This indicates a slowing labor market, giving the Fed more flexibility to continue its easing cycle into the next year. Therefore, we see any short-term gains in the USD/JPY pair as chances to sell. Given the uncertainty surrounding next week’s BoJ decision, implied volatility in the options market has surged, similar to spikes during the policy changes in 2024. Derivative traders might consider using straddles or strangles to profit from significant price swings in either direction, allowing them to take advantage of expected volatility without making a specific bet on the meeting’s outcome. For now, it’s crucial to monitor key technical levels. The 156.00 level acts as a strong ceiling, while 155.00 serves as a major support floor. A clear break below 155.00 after the BoJ announcement could lead to a sharp decline toward the 154.35 area, allowing traders to adjust their positions accordingly. Create your live VT Markets account and start trading now.

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