The USD/JPY pair is currently under slight downward pressure, trading around 155.75 after briefly exceeding 156.00. The strength of the Japanese Yen is contributing to this trend, driven by expectations of a rate hike from the Bank of Japan (BoJ). Comments from BoJ Governor Kazuo Ueda have increased expectations for a rate increase. He suggests that the bank is likely to meet its economic and price forecasts, which supports the Yen. At the same time, the US Dollar is weakening, coming close to its lowest level since November, as a Federal Reserve rate cut looms.

Positive Risk Environment

A positive risk environment is limiting strong upward movement for the Yen. Traders are focusing on important US economic reports due this week, such as the ADP employment report, ISM Services PMI, and especially the US PCE Price Index coming out Friday. The BoJ manages Japan’s monetary policy, aiming for price stability with a 2% inflation target. Its long-standing ultra-loose monetary policy, including Quantitative and Qualitative Easing and negative interest rates, led to Yen depreciation. However, in 2024, the BoJ began to reverse this policy due to rising inflation and better salary prospects, moving away from its previous approach. As December begins, the USD/JPY pair remains below the 156.00 level. The pressure largely comes from the widening gap between the paths of the Bank of Japan and the Federal Reserve, suggesting that the pair may continue to decline.

Market Pricing And Economic Indicators

The market is now pricing a more than 85% chance of a Fed rate cut at their meeting on December 17th. This follows a US Core PCE inflation figure that dropped to 2.4%, the lowest this year. As a result, few traders want to take long positions on the dollar with such a widely anticipated change. On the other hand, expectations for a Bank of Japan rate hike are increasing, especially after Ueda’s recent comments. Japan’s core inflation has been above the 2% target for nineteen consecutive months, a significant change from the deflationary period before 2023. This supports the view that the BoJ might follow its historic policy shift from March 2024 with another hike soon. Given this situation, traders might consider positioning for a lower USD/JPY, while also guarding against uncertainty. Buying JPY call options or USD put options allows for downside exposure while limiting risk ahead of this Friday’s US jobs report. Implied volatility for one-month options has risen to 9.5%, indicating that the market expects a notable movement after the Fed meeting. It’s important to remember the sharp interventions we witnessed in 2024 when the pair surpassed the 158.00 mark, showing that there is a limit to how weak the Yen can become. A robust US jobs report on Friday could cause a short-term spike upward, challenging the bearish outlook. Nevertheless, the ongoing divergence in monetary policy is the main theme for the weeks ahead. Create your live VT Markets account and start trading now.

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