USD/JPY has hit a one-and-a-half-year high of around 159.45, mainly because the Japanese Yen is weakening. This trend comes after reports that Prime Minister Sanae Takaichi might dissolve the lower house of Parliament, leading to potential early elections. Concerns about political instability are pushing the Yen down. Expectations of a more relaxed monetary and fiscal policy in Japan are also adding pressure. Meanwhile, the US Dollar remains strong, with the US Dollar Index hovering near 99.25, helping to support USD/JPY.

US Inflation Data Boosts US Dollar

Recent US inflation data is positively affecting the US Dollar. In December, the headline Consumer Price Index (CPI) rose by 2.7%, while core CPI increased by 2.6% year-over-year. This data supports the Federal Reserve’s decision to keep interest rates steady, boosting USD/JPY. Technically, USD/JPY is above 159.33 and above a rising 20-week Exponential Moving Average (EMA) of 154.19, indicating a strong upward trend. However, an RSI of 70.85 suggests the market may be overbought, signaling slower gains or a possible consolidation. If it drops, support may be found at the 20-week EMA. As USD/JPY approaches the 160.00 level, we see a clear difference in central bank approaches. The recent US inflation data, steady at 2.7%, gives the Federal Reserve little reason to lower interest rates soon. This is a major factor supporting the US Dollar’s strength. In contrast, the political uncertainty in Japan indicates that the Bank of Japan will likely maintain its loose monetary policy. With the possibility of early elections, any sudden policy changes seem unlikely. This played out throughout 2025, where expectations for a shift in the BoJ’s policies were repeatedly pushed back.

Strategies and Potential Risks

The 160.00 mark is crucial and poses a high risk of government intervention. There were sharp pullbacks from multi-decade highs in 2024 when Japan’s Ministry of Finance intervened to protect the Yen. We can expect more verbal warnings from officials, creating significant headline risk for anyone holding long positions. Given the strong upward trend but high chances of a reversal, buying out-of-the-money call options is a viable strategy. This allows participation in a potential breakout above 160.00 while limiting downside risk to the premium paid. For instance, a call option with a 161.50 strike expiring in late February could benefit from a continued rally. For those aiming to hedge or bet on a downturn, put options can provide protection. Buying puts with a strike price below the key 20-week EMA support level of around 154.00 could be wise. This acts as insurance against a sudden policy change or market intervention that could cause the pair to plunge. The tension around these levels also creates opportunities for volatility trading. A long straddle strategy, which involves purchasing both a call and a put option at the same strike price and expiration date, can be profitable if USD/JPY makes a significant move in either direction, especially as we approach this critical point. Create your live VT Markets account and start trading now.

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