USD/JPY briefly dropped below a 10-week range but has bounced back, increasing by 90 pips to reach 147.87. This level is central to the trading range seen since July. The strength of the US dollar is partly due to the votes from the FOMC. Members Bowman and Waller chose not to support a proposed cut of 50 basis points. This cautious approach from the Fed aims to avoid drastic rate cuts that could trigger inflation and weaken confidence in the US dollar.

Impact On Gold Prices

The Fed’s current policy has affected gold. While gold prices hit record highs earlier this year, they have since seen a slight pullback. The recent rebound indicates that USD support might continue, which could lead to more gains. There are signs of economic strength in the US, bolstered by remarks from Chairman Powell and interpretations of recent non-farm payrolls as driven by immigration. Today’s initial jobless claims report also suggests potential stability in the job market. If US employment numbers stay strong, the USD may rise further. This could lead to the USD/JPY exchange rate testing the July 31 high of 151.00. The recent bounce in USD/JPY is a notable signal after the pair briefly dipped below its 10-week range yesterday. This failed dip indicates significant support, and with the price back at 147.87, the easiest path seems to be upward. For those trading derivatives, this might mean selling puts or starting bullish call spreads could be a smart move.

Federal Reserve’s Policy Outlook

The dollar’s strength is supported by the Federal Reserve’s apparent independence, which decreases the likelihood of major rate cuts. This is reflected in bond yields, with the 2-year Treasury note yield consistently staying above 4.5% this week, signaling that the market is discounting any upcoming deep cuts. This stable policy outlook makes holding long dollar positions against a low-yield currency like the yen more appealing. Evidence of US economic strength gives this trade more potential. For instance, the latest retail sales figures for August showed a modest increase of 0.3%, exceeding expectations for no growth, suggesting that consumer spending is sturdy. This strong data backs the Fed’s cautious stance and supports a stronger dollar. Given this context, it might be a good idea to buy call options on USD/JPY, targeting the July 31 high of 151.00. Options that expire in October or November would provide ample time for the pair to test that important resistance level. The recent failed drop near 146.00 now serves as a clear stop-loss level for this bullish outlook. However, we should remember historical events as we approach the 150-152 zone. Japanese authorities directly intervened to strengthen the yen when the dollar hit these levels in late 2022 and issued strong warnings throughout 2024. Therefore, traders should be ready to take profits on long positions as we get closer to those highs or use option strategies to guard against a sudden reversal. Create your live VT Markets account and start trading now.

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