USD/JPY has risen recently due to higher U.S. yields and an earthquake in northeast Japan. Markets see a 90% chance of a 25 basis point rate hike from the Bank of Japan next Friday. Currently, the pair is at 156.16, with trends pointing towards a stronger USD. Short-term movements in USD/JPY are influenced by worries about a tough Federal Reserve and a softer Bank of Japan. For the yen to recover significantly, the Bank of Japan needs to provide clearer guidance and demonstrate fiscal responsibility. A weaker USD and lower U.S. rates would also help. Right now, concerns about a hawkish Fed and a dovish BoJ support the USD/JPY.

Support And Resistance Levels

Daily indicators show a slightly bearish trend, although the RSI drop is mild. Important support levels are at 155.70, 154.40, and 151.60. Resistance levels are at 156.70, 157.90, and 158.87. This information was updated on December 9 to highlight that short-term USD/JPY trends are shaped by worries about a hawkish Fed and a dovish BoJ. With USD/JPY at 156.16, the short-term outlook suggests a stronger dollar. Last month’s U.S. Core PCE inflation came in at 3.1%, pushing the Federal Reserve to stay hawkish. This is a stark contrast to Japan, where a dovish outlook remains. The Bank of Japan is expected to raise rates by 25 basis points on December 19, a move that markets have largely priced in at 90%. However, we anticipate this hike to be “dovish,” as future tightening seems uncertain, particularly after the earthquake, which might lead to increased government spending and further weaken the yen.

Trading Strategies And Risks

For traders in derivatives, buying near-term USD/JPY call options might be a good strategy. Targeting strike prices around the resistance levels of 157.90 and the 2025 high of 158.87 could allow for benefit from the expected rise. Using a bull call spread can also reduce costs in this environment of rising yields. However, traders should be wary of a key risk: intervention from Japan’s Ministry of Finance, as we saw several times in 2024 when USD/JPY approached 160. To protect against a sudden drop due to intervention, holding out-of-the-money put options could be a wise move. This ensures a balanced position during potentially volatile weeks. Implied volatility for USD/JPY options has increased, with the U.S. 10-year Treasury yield exceeding 4.35% and the BoJ meeting only a week away. This heightened volatility makes selling options risky but could enhance payouts for directional bets. Traders should prepare for price fluctuations around major announcements. Create your live VT Markets account and start trading now.

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