The USD/JPY pair rose to about 155.60 in the early Asian session on Thursday. The US Dollar strengthened against the Japanese Yen due to cautious comments from Federal Reserve Governor Christopher Waller. Traders are anxious as they await the US Consumer Price Index (CPI) inflation data for November, which will be released later today. Waller indicated that the US central bank is not rushing to cut rates, which may provide short-term support for the US Dollar. Current market forecasts predict two interest rate cuts next year. Right now, there is a 75.6% likelihood that rates will remain the same at the Fed’s January meeting, an increase from last week’s estimate of nearly 70%.

Interest Rate Outlook for Japan

At the same time, Japan’s anticipated interest rate hike by the Bank of Japan (BoJ) could benefit the Yen. The BoJ is likely to raise the rate from 0.5% to 0.75%, reaching a 30-year high. Governor Kazuo Ueda recently noted that the chances of achieving the central bank’s economic and price goals are increasing. The Japanese Yen is a heavily traded currency influenced by Japan’s economic performance and BoJ policies. Recent changes in monetary policy and bond yields have supported the Yen. Additionally, its reputation as a safe-haven currency draws investors during uncertain market conditions. With the US CPI report coming out today and a Bank of Japan rate decision tomorrow, we should expect significant market fluctuations. This situation is ideal for options strategies like straddles, which can profit from large price movements in either direction. The current USD/JPY level at 155.60 indicates that the market is waiting for these important data releases. The Federal Reserve’s cautious approach is a key factor supporting the Dollar. October’s core CPI showed a stubborn 3.2%, and another strong inflation reading today could strengthen the Fed’s stance of “higher for longer.” This would likely push the USD/JPY pair higher, making near-term call options appealing for those betting on ongoing US inflation.

Potential Impact of BoJ’s Rate Hike

On the other hand, the Bank of Japan is expected to increase its rate to 0.75%, a level not seen in many years. Remember, the BoJ started moving away from negative rates back in 2024, so this hike continues that trend. A rise in rates could boost the Yen, leading traders to consider put options as a way to protect against or bet on a sharp drop in the currency pair after the announcement. We must also keep in mind the risk of direct intervention from Japanese authorities, reminiscent of actions taken in 2024 when the pair neared 160. The primary factor driving these movements is the significant interest rate gap, with the US 10-year bond yield more than 350 basis points higher than its Japanese counterpart. This yield difference suggests that even with a BoJ rate hike, any potential Yen strength may be short-lived unless the Fed indicates more aggressive rate cuts for 2026. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now