Fed Policy Expectations Shift
Markets are pricing in steady US policy, with CME FedWatch showing a 97.3% chance the Fed keeps rates at or above 3.50%–3.75% at the December meeting. That is up from 32.4% a week earlier. The Japanese Yen weakened against the US Dollar, but gained versus major Asian and European currencies due to its safe-haven role. USD/JPY stayed above the rising 20-day EMA near 158.10 after a dip toward 157.70. The 14-day RSI moved above 60, pointing to upward momentum. Resistance is around 160.00 and then 160.50, while support sits at 158.70 and 157.50, with a further level at 156.46. We are seeing the USD/JPY pair once again challenge the critical 160.00 level, a situation reminiscent of what we observed in late 2025. This time, the dollar’s strength is being fueled by renewed geopolitical tensions in the South China Sea, pushing capital toward safe-haven assets. However, unlike last year, the underlying economic fundamentals are starting to diverge significantly.Changing Underlying Economic Fundamentals
Looking back, the market in 2025 was convinced of the Federal Reserve’s hawkish stance, but the situation has now changed. Recent data released for February 2026 showed US core inflation cooling to 2.5%, while the unemployment rate ticked up to 4.2%, its highest in two years. This has shifted expectations for US interest rate policy considerably. The CME FedWatch tool now indicates a 70% probability of a Fed rate cut by the June 2026 meeting, a stark contrast to the 97% chance of rates holding firm that we saw this time last year. This potential narrowing of the interest rate differential between the US and Japan is a key factor traders must now consider. The dollar’s dominance may not be as secure as it was. On the Japanese side, the landscape has also evolved since the Bank of Japan officially ended its negative interest rate policy in the fourth quarter of 2025. The preliminary results from this month’s “Shunto” wage negotiations are showing average pay increases exceeding 4.5%, putting pressure on the BoJ to consider further policy tightening. This provides a fundamental reason for potential yen strength that was absent previously. For derivative traders, this creates an environment ripe for volatility, suggesting a move away from simple directional bets. Given the risk of a sharp reversal, buying long-dated puts on USD/JPY could serve as a valuable hedge against a turn in central bank policy. Alternatively, straddles or strangles could be used to profit from a significant price move in either direction, which is likely as the pair trades near this sensitive level. We must also remember the Ministry of Finance’s direct intervention in the currency market back in 2024 when the pair first crossed the 160 threshold. The threat of similar official action is extremely high, making short-term options strategies focused on implied volatility more attractive than holding spot positions. The risk of a sudden, intervention-driven 300-pip drop is very real. Create your live VT Markets account and start trading now.
Start trading now – Click here to create your real VT Markets account
