The USD/JPY has broken through June’s high of 148.019, reaching May’s high of 148.647, with a recent peak at 148.669. On the 4-hour chart, there’s a swing area between 148.56 and 148.73. If the price passes this area, it could target the 50% midpoint of the decline from early January to April’s low, which is 149.375. One reason for the US dollar’s rise is a second assessment of the Consumer Price Index (CPI). The core goods CPI increased by 0.7%, the highest in two years. Pantheon Macroeconomics forecasts a core Personal Consumption Expenditures (PCE) increase of 0.35%. This is the Federal Reserve’s preferred measure of inflation, which affects their interest rate policies.

Factors Affecting USD/JPY

The report highlights items impacted by tariffs, showing significant price rises like 4.3% for men’s shirts and sweaters, 3.9% for women’s dresses, 3.7% for cookware and tableware, 1.9% for appliances, and 1.8% for toys. US yields have also increased, with the 2-year yield up by 4.6 basis points and the 30-year yield up by 1.2 basis points, indicating shifts in interest rates. Given this breakout, the outlook for USD/JPY appears to be clearly upward. Our strategies in derivatives will reflect this. This movement isn’t just technical; it’s driven by growing fundamental differences. The Fed has clear reasons to maintain its stance, as the latest Core PCE data still shows a significant 2.8% year-over-year increase. Additionally, the recent Producer Price Index (PPI) exceeded expectations, with final demand goods rising by 0.4%, highlighting the inflation pressures noted by Pantheon’s team. This strengthens the dollar’s appeal, supporting the carry trade that’s negatively impacted yen bulls for over a year. In contrast, the Bank of Japan remains inactive. Although Governor Ueda has mentioned watching the yen’s rapid declines, their lack of significant action speaks volumes. As long as their policy remains very loose, there’s little incentive to purchase yen. The latest CFTC Commitment of Traders report confirms this sentiment, showing non-commercial traders holding a large net short position of over 125,000 contracts against the yen. While this trade is crowded, it indicates a strong and established trend.

Options Market Strategy

For options traders, this situation calls for buying exposure to further price increases. One-month implied volatility for USD/JPY is around 8.5%, which isn’t too high given the circumstances. Historically, when the pair sharply rose in late 2022 towards 152, volatility was much greater. Therefore, purchasing call options or call spreads targeting the 149.375 midpoint, and even the important psychological level of 150.00, presents an appealing risk-reward scenario. The main risk lies in potential intervention from Japan’s Ministry of Finance if the pace of the rise becomes too quick. We’ll use options to manage our risk against such events, allowing time for the strong yield difference to continue supporting the dollar. Create your live VT Markets account and start trading now.

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