The US Dollar is bouncing back a bit, currently trading at about 153.60 against the Japanese Yen. This small recovery comes after it hit a four-year low earlier this week, following comments from the US President that hinted at a weaker currency. There’s a nearly 95% chance that the Federal Reserve will keep interest rates between 3.50% and 3.75%. All eyes are on Fed Chair Jerome Powell’s press conference for clues about future rate changes, especially with two potential cuts expected later this year.

US Economic Indicators

US economic indicators indicate that the Fed can afford to be patient with interest rate cuts, even with moderate inflation and steady job markets. A prolonged pause could actually strengthen the US Dollar. Meanwhile, the Yen is supported by expectations that the Bank of Japan will raise interest rates. Policymakers are increasingly confident about wage growth and inflation, which helps the Yen despite Japan’s fiscal worries and upcoming elections. In general market trends, the US Dollar is performing differently against major currencies, gaining the most against the Swiss Franc. A heat map tracks how these currencies compare, showing the latest trends. Back in January 2025, we noted the US Dollar trying to recover at 153.60 against the Yen. The Federal Reserve was keeping rates steady after several cuts, while the Bank of Japan was looking toward tightening. This set the stage for a major policy shift that unfolded over the past year.

Monetary Policy Divergence

That divergence became clear when the Fed made two quarter-point cuts in 2025, lowering the target rate to the current 3.00-3.25% range. At the same time, the Bank of Japan ended its negative interest rate policy in mid-2025, following through on its more aggressive stance. This key change has driven the USD/JPY down to about 142.50. With US inflation easing—December 2025’s CPI was 2.5%—and unemployment rising slightly to 4.1%, the Fed might be close to finishing its cycle of rate cuts. This could create a support level for the US Dollar, making further aggressive short positions risky. For traders dealing in derivatives, the cost of USD put options may now be unattractively high. On the flip side, the Yen’s strength is now tied to the next moves of the Bank of Japan, which are connected to wage growth. Last year’s “Shunto” spring wage talks led to an average wage increase of over 4.5%, giving the BoJ confidence to tighten. Attention is now focused on the upcoming 2026 negotiations to see if this momentum can continue. Given that the Fed may pause and the BoJ is reacting to data, implied volatility in USD/JPY may go down in the short term. It would be wise to consider strategies that benefit from a stable price range, like selling short-dated strangles, to collect premiums while waiting for the next market event. However, keeping some longer-dated JPY call options could be a smart hedge against unexpectedly strong wage growth in Japan. Create your live VT Markets account and start trading now.

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