The Japanese Yen is gaining strength against the US Dollar as the Dollar has dropped due to moderate inflation rates in the US. This has led to increased expectations for interest rate cuts by the Federal Reserve, which has further weakened the Dollar. In July, the Consumer Prices Index showed that annual inflation held steady at 2.7%, which was unexpected. Meanwhile, the Core CPI rose to a 3.1% yearly rate, exceeding the expected 3.0%. This has pushed the odds of a rate cut in September to 95%.

Technical Analysis Insights

Technical analysis indicates that the USD/JPY is trading within a corrective channel around the 147.05 level. If it breaks below this point, it could confirm a bearish flag pattern, targeting levels like the July 25 low of 145.85 and the 78.6% Fibonacci retracement level at 144.50. The Federal Reserve meets eight times a year to set monetary policy, which affects the value of the US Dollar through interest rate adjustments. Quantitative Easing (QE) tends to weaken the Dollar, while Quantitative Tightening (QT) strengthens it. These policies are key factors in the Dollar’s global value. As we enter August 2025, the US Dollar continues to weaken against the Japanese Yen, thanks to lower-than-expected inflation figures. The likelihood of the Federal Reserve cutting interest rates at their September meeting is now very high. This optimism was reinforced by the recent job report from the Bureau of Labor Statistics, released on August 1st. It showed a modest increase of 180,000 jobs in non-farm payrolls, slightly below expectations. This aligns with the July Consumer Price Index, which remained at 2.7%, giving the Fed the flexibility to adjust its policies.

Considerations for Traders

Given this outlook, we are thinking about purchasing put options on the USD/JPY pair. A critical level to watch is 147.05; if the pair decisively falls below this, it would signal us to take action. This could confirm a bearish trend that has been developing for weeks. We recall a similar scenario in late 2023 when Fed expectations weakened the Dollar significantly. During that time, from October to December 2023, the USD/JPY fell from over 151 to below 141. This history suggests that a quick decline could happen once the rate cut cycle begins. Our first target for this bearish move is the recent low of 145.85. If the momentum keeps going, we will look towards the 144.50 level, which coincides with a major Fibonacci retracement. Traders can also consider using futures contracts to short the pair and aim for these levels. However, we should stay alert for any unexpected hawkish comments from Fed officials leading up to the September meeting. Buying some inexpensive, short-term call options could be a good strategy to protect against an unforeseen rally in the Dollar. This would safeguard us if the market has jumped the gun on rate cut expectations. Create your live VT Markets account and start trading now.

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