USD/JPY is on the rise as the US Dollar strengthens, boosted by higher US Treasury yields. This movement comes amid market expectations for the Federal Reserve’s upcoming decision and recent volatility triggered by a strong earthquake in Japan. Currently, USD/JPY is around 155.80, up 0.30%, thanks to a solid US Dollar and increasing Treasury yields. The market predicts an 86% chance of a 25 basis point interest rate cut by the Federal Reserve.

Upcoming US Economic Indicators

Attention is turning to key US economic reports set for Tuesday, including the ADP Employment Report. Additionally, on Friday, the PCE data showed a slower-than-expected decline in inflation. The Bank of Japan (BoJ) faces challenges after the earthquake, affecting its plans for rate hikes. Japan is dealing with economic uncertainty following a 7.6-magnitude earthquake, which triggered tsunami warnings in several regions. This situation puts additional pressure on the Japanese Yen due to worries about potential economic fallout. Recent data indicates Japan’s GDP has been revised down by 2.3% annually, while nominal wages increased by 2.6% in October. Even with a weaker JPY, expectations remain for a BoJ rate hike in December, as indicated by high JGB yields. As of December 8, 2025, there is a clear upward trend for the USD/JPY pair, largely driven by hopes for a “hawkish cut” from the Federal Reserve and uncertainty following the major earthquake in Japan. Traders should prepare for continued strength in the US dollar against the yen in the near term.

Federal Reserve Meeting and Strategies

The Federal Reserve’s meeting this Wednesday is crucial. We expect a 25-basis-point rate cut along with strong language against inflation. Recent data supports this cautious approach, as the Consumer Price Index (CPI) for October 2025 is stubbornly high at 3.4%, exceeding the Fed’s target. Thus, options strategies that take advantage of a stronger dollar, such as buying USD/JPY call options with strikes around 156.50 or 157.00, could be beneficial. In Japan, the recent earthquake complicates the BoJ’s plans for monetary normalization. Following past disasters, like the Great Hanshin earthquake in 1995, the BoJ maintained a supportive policy. We expect a similar delay in any rate hikes now, suggesting ongoing yen weakness, making it a favorable currency to short against the dollar. With high event risk, we anticipate increased volatility around the upcoming central bank announcements. Strategies like long straddles on USD/JPY could be effective, as they are designed to profit from substantial price movements in either direction. This method also hedges against an unexpected dovish statement from the Fed or unforeseen actions by the BoJ. Risk management will be crucial, as market sentiment can change quickly, similar to sharp policy changes observed in early 2024. Utilizing defined-risk option spreads, like bull call spreads, can enable participation in the upside of USD/JPY while limiting potential losses. This approach allows us to navigate expected volatility without exposing portfolios to unlimited risk. Create your live VT Markets account and start trading now.

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