The USD/JPY has dropped to about 150.30 in early Asian trading on Friday. This decline follows a cautious signal from Fed Chairman Jerome Powell and ongoing political uncertainty in the US, which is affecting expectations for Fed rate cuts and possibly delaying rate hikes from the Bank of Japan (BoJ). Fed officials, including Christopher Waller, support further interest rate cuts due to mixed job market data, putting downward pressure on the USD against the JPY. The US government shutdown, which has lasted for 16 days, is causing economic losses estimated at $15 billion per week, contributing to the USD’s decline.

Political Speculations and Impact on BoJ

There are speculations that the BoJ may postpone rate hikes due to domestic uncertainties, which could weaken the JPY and affect the currency pair. The BoJ’s past ultra-loose monetary policy led to a weaker JPY, but recent shifts in policy may provide some support to the currency as global interest rates change. The Japanese Yen is influenced by BoJ policy, bond yield differences, and overall risk sentiment, often being seen as a safe haven. Market instability typically strengthens the Yen as investors seek more stable options during uncertain times. We are observing the USD/JPY pair weaken below 150.50, driven by expectations of a Federal Reserve rate cut and the ongoing US government shutdown. This decline is further supported by recent data showing initial jobless claims increased to 245,000 last week, highlighting a sluggish US labor market. Traders should expect more weakness in the dollar as these factors affect the economy. The consistent cautious approach from Fed officials indicates that betting on a weaker dollar is the main strategy for the upcoming weeks. This makes purchasing USD/JPY put options with strike prices around 149.50 and 149.00 an increasingly appealing option. These derivatives would gain value if the dollar continues to drop against the yen.

US Government Shutdown and Economic Impacts

The US government shutdown, now entering its third week, poses a significant burden on economic output. This situation is similar to the shutdown in 2018-2019, which reduced GDP growth and prompted a shift to safe-haven assets like the yen. A prolonged shutdown could push the currency pair closer to the important support level of 150.00. However, the main risk to this bearish outlook comes from potential hesitation at the Bank of Japan. The narrowing gap in the US-Japan 10-year bond yield, which has fallen below 3.5% for the first time since early 2024, could reverse if the BoJ delays its rate hikes. This uncertainty makes buying inexpensive, out-of-the-money call options a viable strategy against a sudden rebound in the pair. Given these conflicting influences from the US and Japan, implied volatility for USD/JPY options has been increasing. We have seen the Cboe/CME FX Yen Volatility Index reach levels not seen since the last major BoJ policy shift in 2024. This environment allows traders to use strategies like straddles to prepare for significant price movements, regardless of the ultimate direction. Create your live VT Markets account and start trading now.

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