USD/JPY traded near 153.60 on Monday, up 0.54%. Trading was quieter because several Asian markets were closed for the Lunar New Year, and US markets were closed for President’s Day. The US Dollar stayed fairly steady, which helped support the pair during the long US weekend. The US Dollar Index (DXY) hovered near 97.00, showing a small gain against a basket of six major currencies. Markets remained cautious ahead of a busy week of economic data and a speech from Federal Reserve Vice Chair for Supervision Michelle Bowman, which could provide clues about future policy.

Japan GDP Miss Weighs On Yen

In Japan, preliminary fourth-quarter GDP data weighed on the yen. The economy grew just 0.1% quarter-on-quarter, below the 0.4% forecast. Annualised growth was 0.2%, well under the 1.6% forecast. In the previous quarter, Japan’s GDP fell 0.7%, equal to a 2.6% annualised decline. The latest numbers lowered expectations for a Bank of Japan rate hike as early as March. Markets also focused on a meeting between the Prime Minister and BoJ Governor Kazuo Ueda. Ueda said the discussion was about general economic and financial conditions and did not include any direct request about interest rates. Attention now shifts to central bank remarks and scheduled data releases this week. Looking back at early 2025, disappointing Japanese data quickly weakened the yen. The Q4 2024 GDP report came in far below expectations, which reduced the chances of a Bank of Japan rate increase at the time. This is a clear reminder that the yen can react quickly to signals about domestic growth.

Rate Differential Drives Trade

The main driver today is the wide interest rate gap between the United States and Japan. The US Federal Reserve funds rate is holding near 4.50% as inflation remains sticky. Inflation recently rose 2.8% year-on-year in January, keeping pressure on the Fed to stay restrictive. This gives the dollar a strong yield advantage. By contrast, the Bank of Japan policy rate remains near 0.10%, even after ending negative rates last year. For derivatives traders, this setup can make selling JPY call options appealing as an income strategy. By selling calls with strike prices well above the current market, traders collect premium based on the view that the large rate gap will limit any sharp yen rally. In other words, it is a bet that USD/JPY will keep drifting higher or trade in a range. Still, caution is important. With USD/JPY trading closer to 158.00, a level that has previously prompted warnings from Japanese officials, downside protection can be valuable. Buying far out-of-the-money USD/JPY put options can be a relatively low-cost hedge against a sudden policy change or direct intervention by Japanese authorities. This can help protect against a fast, unexpected drop in the pair. Create your live VT Markets account and start trading now.

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