USD/JPY has risen above 147.00 as focus shifts to upcoming US Consumer Price Index data. The US Dollar is strengthening against the Japanese Yen, partly due to better interest rates, with USD/JPY’s RSI climbing to 64. The JPY faces pressure because low interest rates are causing funds to move toward higher-yield currencies like the USD. The Federal Reserve’s interest rates, between 4.25% and 4.50%, are influencing this exchange rate, with attention on US CPI data.

Expected CPI Figures

For June, the US CPI is projected to increase by 0.3% monthly and show a yearly growth of 2.7%, up from 2.4% in May. Core CPI, excluding food and energy, is also expected to rise by 0.3% month-to-month, with an annual increase to 3%, up from 2.8% in May. From a technical perspective, USD/JPY is making gains, facing resistance at 148.00, while support holds at the 38.2% Fibonacci retracement level of 147.14. If the price surpasses 148.00, it might retest the 148.65 high and the 149.38 Fibonacci point. Support levels are noted at 146.00 and the 10-day SMA of 145.69. The US Dollar is heavily traded, accounting for 88% of foreign exchange activity, and is largely influenced by the Fed’s monetary policies, including interest rate changes and quantitative easing or tightening measures.

Trader Sentiment and Risks

With the yield gap widening in favor of the USD, we expect the currency pair’s path to lean higher. Still, traders must beware of complacency. Recent US inflation data revealed a year-over-year Consumer Price Index increase of 3.7%, which was higher than expected, supporting the Federal Reserve’s stance of keeping rates high for an extended period. The CME FedWatch Tool indicates a continuous, albeit lower, chance of another rate hike by year-end, boosting support for the dollar during dips. Our attention is not just on the dollar’s strength but also on the yen’s weakness. A rising USD/JPY could be threatened not by a dovish Fed, but by a hawkish Bank of Japan or direct actions from the Ministry of Finance. Japan has previously intervened in the currency markets when USD/JPY surpassed 150, spending over $60 billion to stabilize the yen. With market levels approaching those extremes, Finance Minister Suzuki has issued warnings against “excessive” and “speculative” moves. This serves as a real threat of intervention, which can cause significant drops in minutes. Given these risks, we are positioning our derivative strategies to benefit from upward movements while hedging against possible interventions. We are avoiding outright long positions due to skewed risk-reward. Instead, we prefer buying call spreads, such as purchasing the 148.00 strike call and selling the 150.00 strike call simultaneously. This approach limits our risk and allows profit from continued price increases toward the critical intervention zone, with the sold call making the position less costly. Additionally, we find implied volatility too low considering current events. The market may be underestimating the potential for a sudden policy shift from Japan, where inflation has stayed above the central bank’s 2% target for over a year. Thus, we are also adding long positions in out-of-the-money puts around the 146.00 strike. These should be seen as affordable and crucial insurance against a sudden downturn led by Japan. Create your live VT Markets account and start trading now.

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