The USDJPY pair is currently near an important resistance level, as focus shifts to Japanese politics and upcoming US economic data. The US dollar is one of the weakest major currencies, helped by positive news on tariffs and lower-than-expected inflation data from last week. Markets predict two rate cuts from the Fed by the end of the year, with conditions remaining stable. In Japan, the Tokyo CPI figures also came in lower than expected, and for the JPY to appreciate further, we might need weak US data or higher inflation in Japan. On the daily chart, the USDJPY dropped below the 148.30 resistance level, falling to 146.00 before recovering. Sellers are likely to continue targeting the 148.28 resistance, hoping for a decline to the 142.35 support level. Buyers are looking for a breakout to turn bullish towards the 151.20 resistance. In the 4-hour chart, a small resistance at 147.00 has become support, with buyers expected to accumulate here, aiming to break above 148.28. Sellers might watch for a price drop to take advantage of bearish opportunities leading to the 142.35 support. In the 1-hour chart, buyers are looking for chances to buy dips at support, while sellers are aiming for a downward breakout to hit new lows.

Critical Technical Point

The currency pair is at a key technical point, indicating that volatility may increase in the weeks ahead. Conflicting economic signals from the US and Japan create uncertainty, making it crucial to assess risk for new positions. This tension provides an opportunity for strategies that can benefit from significant price movements, no matter the direction. Recent data shows persistent core inflation in the US, with the latest CPI figures at 3.8% year-over-year. This raises doubts about the expected two rate cuts, making a sharp drop in the dollar less likely. We believe this strength suggests traders should be careful about betting aggressively against the US dollar based solely on monetary policy. In Japan, national inflation recently stood at 2.2%, falling short of expectations. This supports a cautious approach from the Bank of Japan, as the recent rate hike did not come with strong commitments for further tightening. This indicates weak fundamental support for the yen to gain sustained strength.

Possibility of a Short Squeeze

Given the current standoff, buying options to capitalize on potential volatility seems wise. A long straddle, which involves purchasing both a call and a put option at the same price, allows a trader to benefit from movements in either direction. This strategy fits well with the present uncertainty since it doesn’t require choosing a side. For traders with a specific direction in mind, using options at key technical levels helps manage risk. Bearish traders might consider buying put options to prepare for a drop below the 146.00 support level. On the flip side, bullish traders could buy call options to take advantage of a potential rise above the 148.30 resistance. It’s also important to consider historical context, especially the direct intervention by authorities in late 2022 when the pair went above 150. This creates a psychological barrier, and as we near this level again, the chance of official action to strengthen the yen significantly increases. This is a major risk factor for any long derivative positions. Recent Commitment of Traders data shows that speculative net-short positions against the yen are at historic highs. Such extreme positioning often leads to quick reversals; any positive news for the yen could result in a substantial short-squeeze. This signal warns that simply following the trend of yen weakness may carry significant risk. Create your live VT Markets account and start trading now.

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