The Japanese Yen has dropped against the US dollar during Asian trading. This decline follows less aggressive signals from New York Fed President Williams. The market now expects a rate cut from the Federal Reserve in December, increased by softer US economic data. As of now, the market prices in a 20 basis point cut compared to only 9 basis points on November 20. Analysts suggest that a December rate cut would be a hawkish move, potentially facing disagreements from FOMC members and possibly leading to a pause in early 2024. The yen’s decline could push the Bank of Japan (BoJ) to restart rate hikes, with expectations for a hike in December rising from earlier forecasts of January.

Bank Of Japan and Rate Hike Expectations

The anticipation of a BoJ rate hike has grown due to comments from BoJ officials, including Governor Ueda, who is watching how the weak yen is affecting inflation. Yet, dovish BoJ member Asahi Noguchi has urged a cautious approach to policy changes, moderating his previous stance on rate adjustments. Currently, the Japanese rate market expects about 13 basis points of hikes by December, up from 5 basis points last week. The U.S. dollar is losing strength as we look forward to a more dovish Federal Reserve. Recent data supports this view, with October 2025’s CPI showing inflation cooling to 3.1%, and weekly jobless claims rising to 235,000. These numbers give the Fed room to think about a rate cut in their meeting on December 18. Market pricing reflects this expectation, indicating about 20 basis points of cuts for December, a significant increase from earlier in the month. We predict any cut will be “hawkish,” meaning the Fed will likely hint at a pause for early 2026. Traders should prepare for a short-term dip in the dollar, followed by possible stabilization.

USD to JPY Exchange Rate Movement

As the dollar weakens, the yen remains weak around the 154 level, putting pressure on the Bank of Japan. Japan’s core inflation has been above the 2% target for over a year, currently at 2.9%, which intensifies pressure on Governor Ueda to take action. This makes a BoJ rate hike in December a strong likelihood, a scenario not seriously considered since late 2023. The growing policy gap between a cutting Fed and a hiking BoJ sets the stage for a lower USD/JPY exchange rate. We have noted increased activity in the options market, with a significant rise in JPY calls and USD puts set to expire in late December. This suggests the market is getting ready for the pair to test the 150.00 level by year-end. Still, we must be cautious, as dovish voices like BoJ member Noguchi continue to advocate for a careful approach. This uncertainty means the timing of a hike isn’t guaranteed, which could lead to fluctuations. Derivative traders should closely monitor upcoming U.S. job data and Japanese wage growth figures to confirm this trend. Create your live VT Markets account and start trading now.

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