The GBP/USD currency pair has fallen again, marking eight days of consecutive losses. This drop follows an increase in US Consumer Price Index (CPI) inflation throughout June, prompting traders to rethink the Federal Reserve’s earlier expectations for interest rate cuts by the end of the year. After the new US inflation data was released, GBP/USD dipped below 1.3400, declining by 0.23%. This is the fourth day in a row that the pair has lost value amid growing concerns about tariffs pushing up prices.

Pound Sterling Under Pressure

The Pound Sterling is also facing challenges against the US Dollar, nearing a three-week low around 1.3430. Volatility is expected in the GBP/USD pair as traders await the latest CPI figures from the US. Meanwhile, USD/JPY remains close to its highest level since April, just shy of 149.00, boosted by a cautious market sentiment. Gold prices, typically seen as a safe haven, have seen a slight rebound, but their potential for further gains appears limited due to a strengthening US Dollar. In the cryptocurrency world, legislative advancements have hit a snag. Lawmakers have not made progress on three cryptocurrency-related bills, which has stalled development in this area. The market is starting to realize that the Federal Reserve is in no hurry to change its stance. With the recent core inflation data from the US indicating a stubborn year-over-year increase of 3.4%, discussions about multiple rate cuts in 2024 have faded. The CME FedWatch Tool now suggests only a 58% chance of a single cut by September, a significant shift from earlier predictions. We believe that the ongoing strength of the Dollar is the main driver for market movements in the upcoming weeks, and traders should adjust their strategies accordingly.

Monetary Policy Divergence

For those trading the Pound, the difference in monetary policies is widening. The Bank of England is dealing with UK inflation that has just reached the 2% target, increasing the likelihood that they will cut rates before the Fed does. This disconnect is a strong bearish signal for the currency pair. We see a chance to buy GBP/USD put options with strikes below the 1.3300 level, expecting further declines as this situation develops. Another option is to sell out-of-the-money call spreads to take advantage of the limited upside potential of the pair. Regarding the Yen, the situation is becoming tense. With the pair soaring past 159.00, we are entering a range where Japan’s Ministry of Finance has historically intervened to boost its currency. We remember the sharp declines in late April and early May after suspected interventions. While we remain long on USD/JPY due to the significant yield difference, the risk of a sudden reversal is high. Traders should protect long positions with tight stop-loss orders. A better approach may be to buy long straddles or strangles to benefit from a big volatility spike, whether it leads to a continued rise or a government-induced drop. The recent bounce in gold prices is likely just a temporary pause, not a new trend. Gold’s performance closely follows the US Dollar and real yields, both of which are currently unfavorable. As long as the US Dollar Index (DXY) stays above 105.5, gold will struggle to maintain any substantial gains. We advise traders to view any strength in gold as a chance to initiate short positions via futures or buy put options, countering the Dollar’s persistent strength. Finally, the digital asset space remains stuck in regulatory uncertainty. The initial excitement over the FIT21 bill passing in the House has diminished as it faces a challenging future in the Senate. This legislative stall is hindering the institutional investment that the sector requires for growth. Without a clear regulatory framework, we expect major cryptocurrencies to stay range-bound. This creates an ideal scenario for selling covered calls against existing holdings or for options sellers to collect premiums by selling out-of-the-money call and put spreads on Bitcoin and Ethereum, betting on sideways movement rather than a breakout. Create your live VT Markets account and start trading now.

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The EUR/USD currency pair dropped over 0.8% on Tuesday, hitting its lowest level in almost three weeks. This drop came as hopes for a September rate cut by the Federal Reserve faded, following a rise in US CPI inflation for June. US Consumer Price Index inflation continued to rise toward the end of the second quarter. In June, the annual inflation rate reached 2.7%, surpassing the Federal Reserve’s 2% target and reducing expectations for a rate cut in the near future.

The Federal Reserve’s Rate Decisions

According to the CME’s FedWatch Tool, the market largely expects the Federal Reserve to keep rates steady in July. The chances of a rate cut in September have decreased to 44%, but there’s an 80% probability of two rate cuts in 2025. The Federal Reserve impacts the US economy by adjusting interest rates, focusing on inflation and employment goals. It uses various tools, such as Quantitative Easing during financial crises to ensure credit flow, which generally weakens the US Dollar. Conversely, Quantitative Tightening usually strengthens it. The Federal Open Market Committee, a part of the Federal Reserve, meets eight times a year to make monetary policy decisions. These decisions affect interest rates, the economy, and the value of the US Dollar.

Analyzing Currency Movement Strategies

The landscape has changed, and we need to adapt quickly. The recent decline in the currency pair is not just a momentary dip; it signals a significant adjustment. US inflation is still quite persistent. The latest June report showed a headline figure of 3.1%, down from May’s 3.3%, but still far from the Committee’s goal. Additionally, the job market is robust, with 209,000 jobs added in the latest report, making a near-term easing less likely. Powell has plenty of justification to keep rates higher for an extended period. Our strategy must shift to take advantage of this policy divergence. While the Fed remains firm, the European Central Bank has already cut its key rate in June. Lagarde is dealing with a softer economic backdrop, giving her more room to ease further. This creates a strong, favorable condition for the dollar against the euro. We see the EUR/USD path as likely heading lower. This means it’s time to actively seek short-side exposure. Instead of just shorting the spot market, we should explore the options market to manage our risk. We prefer buying puts or setting up bear put spreads on EUR/USD, aiming for levels below 1.0600 in the coming weeks. This allows us to profit from ongoing declines while limiting our maximum loss. Selling out-of-the-money call spreads is also a sound strategy for generating income, betting that any price rises will be brief and quickly reversed. Historically, the dollar stays strong until the Federal Reserve not only hints at a pivot but also starts cutting rates. We are not there yet. The market’s repositioning supports this; a quick look at the FedWatch tool shows that the chances of a September rate cut have fallen to below 40%, with increasing odds for just one cut by December, if that. The risk to this view could come from a sudden drop in US economic data, particularly if employment or retail sales numbers surprise downward. We’ll keep a close eye on these reports, but for now, the key trade is to position for a stronger dollar. The period of quantitative tightening and its positive impact on the greenback is not finished. Create your live VT Markets account and start trading now.

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On Tuesday, the GBP/USD pair fell again after new US CPI data showed rising inflation. In July, the British Pound has dropped almost 3% against the US Dollar. On that day, the pair fell by two-thirds of a percent, marking the eighth day in a row of losses. The US Dollar strengthened as inflation concerns raised questions about when the Federal Reserve might cut rates.

US CPI Inflation

The US CPI inflation rate rose at the end of the second quarter, reaching an annual rate of 2.7% in June. This is above the Federal Reserve’s 2% target, reducing hopes for an early rate cut. The CME’s FedWatch Tool suggests the Federal Reserve will keep interest rates steady at its July meeting. The chance of rates staying the same in September is now down to 44%. The Fed uses interest rate changes to aim for price stability and full employment. When inflation exceeds 2%, the Fed raises rates, which strengthens the US Dollar. Conversely, when inflation falls below 2%, it lowers rates to stimulate growth. Additionally, quantitative easing (QE) may weaken the US Dollar, while quantitative tightening (QT) is likely to strengthen it.

Derivative Trading Dynamics

In light of these factors, it’s becoming clearer what derivative traders should do. The differences in monetary policies across the Atlantic are the key focus. With US inflation remaining high and the Federal Reserve staying steady, the situation is intensified by developments in the UK. The Bank of England is expected to cut interest rates at its August meeting, creating a noticeable policy gap that drives currency movements. This is not only about a strong dollar but also about a weakening pound. Thus, our strategy should target a continued decline in the GBP/USD. We suggest acquiring put options on the GBP/USD as a direct and managed approach. Recent data supports this view. The latest US Non-Farm Payrolls report showed a strong gain of 272,000 jobs in May, exceeding expectations and giving the Fed more reasons to hold steady. Currently, the CME’s tool indicates the likelihood of a September rate cut has fallen to just 35%, showing a notable shift in expectations. If we look back, a similar but more intense policy divergence occurred in 2022, when the Fed’s rapid rate hikes drove the Dollar Index (DXY) to two-decade highs. While the situation differs in scale, the basic principle remains: a hawkish Fed and dovish other central banks will lead to more investments in the dollar. Data from the Commodity Futures Trading Commission (CFTC) shows that large speculators have been increasing their net short positions on the British Pound for several weeks. We expect this trend to push the GBP/USD down to around the 1.2250 level soon, and our option strategies should be set up to benefit from this movement. Create your live VT Markets account and start trading now.

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In the UK, economic worries persist as the GDP has unexpectedly shrunk, raising the chances that the Bank of England will cut rates by the end of the year. Money markets predict two interest rate cuts, lowering the Bank Rate from 4.25% to 3.75%.

Upcoming Economic Data

Key upcoming economic data includes the US Producer Price Index (PPI) and Retail Sales. In the UK, June’s Consumer Price Index (CPI) is expected to stay stable, with overall inflation at 3.4% and core CPI at 3.5%. There’s a clear difference between the US and UK monetary situations, making it a great opportunity for derivative traders. This narrative is supported by the data. While US inflation has recently dropped to 3.3%, the Federal Reserve’s latest “dot plot” indicates only one potential rate cut this year. This hawkish stance strengthens the dollar as treasury yields stabilize. In contrast, the situation in the UK is different. The country’s inflation has finally met the Bank of England’s 2% target for the first time in nearly three years. This isn’t just a number; it signals that the central bank can start cutting rates. They are likely to begin this process in August. It’s possible the Bank of England’s key rate, currently at 5.25%, could drop by 50 basis points by Christmas, while the Fed may hold steady.

Positioning Through Derivatives

This situation calls for strategic positioning with derivatives that take advantage of this widening policy gap. A simple move is to create short exposure to the pound against the dollar. We find it valuable to buy GBP/USD put options with expirations in late Q3 or early Q4. This strategy allows us to limit our risk to the premium paid while gaining exposure to a potential drop below the 1.2500 level, which is an important psychological and technical support area. The implied volatility on these options is still reasonable, meaning we aren’t overpaying for the chance to go short. This setup feels similar to the period after 2014 when the Fed started its tightening cycle ahead of other central banks, triggering a multi-year dollar bull run. The driving force then, as now, is economic divergence. Recent data from the Commodity Futures Trading Commission shows we’re not alone; speculative funds have started cutting their net long exposure to sterling, sensing a change is coming. With critical US retail sales data approaching, any sign of continued strength in the American consumer will only strengthen this trend, enhancing the dollar’s yield advantage and putting more pressure on the pound. Create your live VT Markets account and start trading now.

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EUR/CHF is currently in a descending triangle pattern, trading around 0.9300. The Euro is struggling against the Swiss Franc, and momentum indicators show a continuing bearish trend. The pair is staying above 0.9293, but a drop below this level could expose 0.9280. If this support breaks, the price may fall to 0.9224. On the other hand, if it moves above 0.9327, the short-term outlook could change. Key resistance levels are at 0.9352 and 0.9360. The RSI shows bearish pressure, indicating more potential for downside. On the 4-hour chart, the price is below the 20-period and 50-period simple moving averages, which are acting as resistance. If the price closes above 0.9330, it may weaken the bearish trend, possibly reaching 0.9495. The pair is supported by a zone around 0.9293, which has been tested many times. The Euro represents the currency for 19 EU countries and made up 31% of global forex transactions in 2022. The Euro is influenced by factors like ECB policy, inflation, economic data, and trade balance. Generally, high interest rates and positive trade balances are good for the Euro. Looking at the technical aspects, our strategy is bearish. The descending triangle pattern suggests that consolidation near 0.9300 should not be seen as support but rather as a starting point for a downward move. The fundamental situation supports this view: the European Central Bank recently cut interest rates for the first time in five years by 25 basis points. While officials stress that they are data-driven, the market anticipates at least one more cut this year. This stands in contrast to the Swiss National Bank (SNB), whose President has made it clear that they are ready to intervene to keep the Franc strong against imported inflation. This difference in central bank policies drives our strategy. Any rise toward the 20-period and 50-period simple moving averages presents an opportunity to take short positions. For those trading in the coming weeks, buying put options is a straightforward choice. We are looking specifically at puts with a strike price below 0.9280, aiming for that 0.9224 target mentioned earlier. With Eurozone inflation unexpectedly rising to 2.6% in May, any short-term Euro strength should be seen as a chance to buy these puts at a better price. The bearish momentum is too strong to ignore. For those with a higher risk appetite, a bear put spread could reduce entry costs. You could buy the 0.9280 put and sell the 0.9220 put to finance the position, profiting if it drops to that level. However, caution is key. The SNB’s surprising de-pegging of the Franc in 2015 is a reminder of potential volatility. A strong break and close above 0.9330 would challenge our view and require reassessment, but right now, all signs point toward a breakdown below 0.9293. The pressure is increasing, and the likely path is downward.

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Gold is trading tightly around $3,330 after the release of the US Consumer Price Index (CPI) report. The headline CPI rose by 2.7% year-over-year, and the core CPI stood at 2.9%, slightly below the 3% forecast. These results have prompted market players to rethink the chances of a rate cut in September. Fed funds futures show a 54.4% chance that rates will remain the same and a 44% possibility that rates will stay high for a longer time. The gold market is facing downward pressure, limited by resistance in the $3,360-$3,371 range. It’s trading cautiously, supported by the 20-day and 50-day Simple Moving Averages around $3,335-$3,324. If these levels are broken, prices could drop further to $3,228 and $3,200. The Relative Strength Index (RSI) is at 49, indicating neutral momentum, which shows a lack of strong price direction right now.

External Economic Factors Affecting Gold Prices

Several external factors are impacting gold prices. A stronger US Dollar and rising Treasury yields are influencing sentiment, as market participants speculate about the Federal Reserve’s future policies. Additionally, President Trump’s public comments regarding the Federal Reserve have affected how the market views the Fed’s credibility. Given the current situation, we consider it a good time to sell volatility. The market is tightly coiled, absorbing the nuances of the CPI report while also reacting to shifting rate-cut expectations. With the RSI hovering around 49, there’s no clear direction, making it ideal for collecting premiums. Traders should consider strategies like short strangles or, for those seeking defined risk, iron condors. Clearly defined resistance and support levels make it easier to set strike prices for these options, offering potential profits from price stagnation in the near future. However, we need to keep in mind the significant external pressures. The US Dollar Index (DXY) has remained strong, recently surpassing 105.5, while 10-year Treasury yields are holding firm above 4.2%. These factors pose challenges for non-yielding assets like gold. This macroeconomic environment limits gold’s upside potential near the $3,371 level. The political dynamics surrounding the Federal Reserve, especially the pressure from the former President, contribute another layer of volatility risk. Therefore, a strategy to sell volatility must be carefully managed, as a single hawkish comment or political news could cause sharp price movements outside the established range.

Market Sentiment and Institutional Positioning

If the support at the 50-day Simple Moving Average breaks, we would need to shift our stance from neutral to bearish. A drop below $3,324 would indicate that macroeconomic pressures have taken over. Historically, sentiment can shift quickly; during the “Taper Tantrum” in 2013, just a hint of reduced quantitative easing caused gold to plummet by over 25% in six months. A similar surprise from the Fed now, especially with rate-cut odds below 50% for September, could lead to significant selling toward the $3,228 target. In that case, we would recommend buying puts or setting up bear put spreads to take advantage of the downward trend. The positioning of institutional investors further supports a cautious approach. Recent data from the World Gold Council shows that gold-backed ETFs in North America and Europe have seen significant outflows in the past month, losing tons of gold. This suggests that larger, long-term investors are pulling back due to concerns about sustained high-interest rates. While physical demand from central banks remains a long-term positive factor, short-term traders in the derivatives market should pay attention to these ETF trends. Create your live VT Markets account and start trading now.

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China’s GDP growth was steady at 5.2% year-on-year in the second quarter. However, monthly reports hinted at a slowdown, particularly with declining investment growth in June, mainly due to reduced housing investments. Deflationary pressures are rising because of excess capacity in some sectors. Analysts expect more actions to stabilize the housing market and encourage service consumption in the second half of the year.

Quarterly Economic Performance

The economy grew by 1.1% from the previous quarter, which is only 0.1 percentage points slower than the first quarter. Even though real GDP growth softened by 0.2 percentage points from the first quarter, consumption and net exports still played key roles in this growth. Meanwhile, the GDP deflator dropped by 1.2% year-on-year. Data from June showed weaker domestic momentum compared to May. This slowdown was partly due to tariff impacts and a reduced temporary production boost. Industrial production grew by 6.8% year-on-year, but retail sales declined, driven by a return to normalcy after the holiday. Fixed asset investment decreased, especially in real estate and infrastructure. Analysts are keeping a 4.8% growth forecast for 2025, anticipating no immediate policy changes but possible measures to stabilize the housing market through acquisition efforts and urban-renovation incentives. We view the overall growth rate as an outdated reflection of past momentum that is now fading. The monthly details and deflationary pressures create a challenging environment ahead. This period calls for caution, as domestic demand is slowing, and the policy response remains weak, guiding strategies for derivatives traders.

Deflationary Pressure And Market Response

The rising deflationary pressure is a significant concern. It reflects deep overcapacity and declining confidence. The producer price index has been contracting for over 20 months, indicating that factories are lowering prices to sell goods in a weak market. The latest Caixin Manufacturing PMI fell to 50.6 in July, just above the expansion threshold and below expectations, confirming sluggish industrial activity. This scenario is pushing down corporate profit margins. It may be wise to buy put options on China-focused ETFs like FXI or MCHI, making a cost-effective, leveraged bet on further declines in equity values as these profit issues develop. The slowdown in housing investment is at the heart of the crisis, and the government is not responding with enough urgency to restore confidence. We’ve seen limited efforts, such as the central bank’s 300 billion yuan re-lending program for affordable housing, but this is insufficient. Data from the National Bureau of Statistics reveals that new home prices in 70 cities fell by 4.5% year-on-year in June, the largest drop in nearly ten years. This ongoing weakness will likely hinder a quick recovery. The uncertainty about when and how effective government actions will be suggests a move towards long volatility strategies. We are considering buying straddles on major Chinese property developers listed in Hong Kong, which could benefit from significant market movements as policies shift and defaults impact prices. This domestic slowdown is also affecting global markets through currency fluctuations. The People’s Bank of China is struggling to support the yuan against a strong dollar and capital outflows. The offshore yuan (CNH) has already fallen past the critical 7.30 mark against the dollar. We see any government-driven rallies in the yuan as chances to initiate new short positions, either through FX options or futures. In the past, significant economic strain in China, such as that during the 2015-16 period, was often followed by a sharp, unexpected currency devaluation that had global repercussions. While we’re not predicting an exact repeat, the risk remains, and holding bearish yuan positions is a good hedge. As a result, we should prepare for a downturn in industrial commodities. China’s role as a global manufacturing and construction powerhouse is diminishing. The struggling property sector is the largest consumer of steel and iron ore. Prices for iron ore have already dropped by nearly 20% from their January peak. We anticipate further declines. Traders should look into buying puts on major mining companies like BHP and Rio Tinto, which are closely tied to Chinese demand. The same reasoning applies to copper, a key indicator of global industrial strength; any further weakness in Chinese manufacturing will lead to lower prices. Create your live VT Markets account and start trading now.

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New Zealand’s Global Dairy Trade (GDT) price index rose by 1.1%, bouncing back from a previous decline of -4.1%. This increase signals a positive change for New Zealand’s dairy industry. In currency news, the AUD/USD pair has continued to drop, hitting five-day lows around 0.6500. This decline stems from strong demand for the US Dollar, driven by rising inflation in the US. Meanwhile, the EUR/USD pair has fallen below 1.1600, influenced by a strong dollar, reaching three-week lows.

Gold Prices and Market Pressure

Gold prices are facing increasing pressure, falling to daily lows near $3,320 per troy ounce. This situation is primarily due to a stronger US Dollar and rising US yields, along with cautious signals from the Federal Reserve. Ripple’s XRP dropped below $3.00, currently trading at $2.87, after a brief rally to $3.03. This decline reflects a general market trend to minimize risks amid unstable conditions in the cryptocurrency space. In China, the GDP for the second quarter grew by 5.2% year-on-year, surpassing expectations. However, there are worries about unexpected slowdowns in fixed-asset investment and retail sales, coupled with falling property prices.

US Dollar Index and Market Impact

The market is clearly signaling the continued strength of the US Dollar. The US Dollar Index (DXY) is reaching multi-week highs, recently surpassing 105.50. This rise is tied to persistent inflation data, reinforcing the Federal Reserve’s tough stance. This trend is likely to continue, influencing how traders approach the market in the coming weeks. Each increase in US yields, currently seen with the 10-year Treasury note holding steady above 4.4%, puts more pressure on dollar-denominated prices. We see this dynamic clearly in the currency markets. The weakness of the AUD/USD pair reflects not just a response to the dollar’s strength but also troubling signals from China. While the GDP number looks good, the details tell a different story. For instance, property investment in China is down over 9% year-on-year, which reduces demand for industrial commodities and negatively affects the Australian dollar. We recommend buying put options on the AUD/USD, aiming for a drop below the 0.6500 level as a straightforward way to capitalize on this weakness. The situation for gold is similar. As a non-yielding asset, gold loses its appeal when traders can secure guaranteed returns from rising Treasury yields. Historically, rising real yields pose a significant challenge for precious metals. We expect continued selling pressure and would advise short positions via futures contracts, as the cost of holding gold rises. In the cryptocurrency market, there’s a noticeable flight from risk. Assets sensitive to liquidity and speculation tend to suffer first during cautious periods. Ripple’s recent price drop after a rally exemplifies this trend. We see this as indicative of broader market conditions, and we suggest traders consider buying volatility through options, expecting larger price swings as the market adjusts to higher interest rates that may persist. Despite these challenges, the positive data from New Zealand’s dairy sector offers a unique opportunity. The GDT increase highlights resilience in a key export area, contrasting sharply with issues facing Australia’s economy. This difference makes a long NZD/AUD position particularly attractive. We believe this trading strategy allows us to leverage the strengths and weaknesses we observe, offering a relative value play that is less impacted by major movements in the dollar. Create your live VT Markets account and start trading now.

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The EUR/JPY pair has hit a new yearly high, staying above 173.00 during the American session. The Yen is under pressure from large interest rate differences, inflation driven by imports, and political uncertainties. In May, Eurozone industrial production recovered strongly, rising 1.7% from the previous month and 3.7% year-over-year. The Euro is gaining against the Yen, as the Yen struggles with interest rate gaps and inflation pressures.

Bank of Japan’s Caution

The Bank of Japan is cautious about raising interest rates, even though inflation is above the 2% target. Political uncertainty ahead of the July 20 Upper House elections is adding pressure, as polls indicate potential losses for the ruling coalition. Concerns about fiscal policy and possible increased government spending after the elections are affecting market sentiment, continuing to weigh on the Yen. Meanwhile, Eurozone industrial activity is bouncing back, with a 1.7% production increase in May and economic sentiment slightly rising to 36.1 in July. Technical charts show a bullish trend for EUR/JPY near 173.00, with strong momentum indicated by a high Average Directional Index. However, the Relative Strength Index shows overbought conditions, which may lead to a short-term pullback.

Fundamental Divergence Between Monetary Policies

The key driver of this trend is the clear difference in monetary policies. The interest rate gap is wide, with the European Central Bank holding its main rate at 4.50% while Japan’s is close to zero. This creates a tough environment for holding Yen, providing a significant boost for the Euro. Additionally, Japan’s core inflation was 2.5% in May, staying above the 2% target and highlighting the reluctance to adjust policies, which affects the Yen’s value. This situation is not only about monetary policy but also politics. Prime Minister Kishida’s administration is facing instability, with approval ratings dropping below 20% in some polls. This uncertainty makes market participants wary, causing them to sell the currency linked to it. The rebound in Eurozone industrial numbers adds justification for favoring the Euro. Traders using derivatives in this environment should find a mix of boldness and caution. The high directional index indicates a trend that should be followed, not opposed. Buying call options on EUR/JPY is a direct way to express this bullish outlook, allowing for leveraged gains while controlling risk to the premium paid. We suggest looking at out-of-the-money calls with expirations in the next few months to take advantage of the strong momentum. That said, the indication of overbought conditions should not be overlooked. A significant short-term pullback is possible. To manage this risk, a bull call spread—buying one call and selling a higher-strike call—is advisable. This strategy reduces upfront costs and aims to profit from further increases, though at a more measured pace. One notable risk is intervention. Sharp Yen rallies earlier this year were linked to possible official actions against the dollar. Japanese authorities can intervene unexpectedly to counter excessive currency weakness. Therefore, selling naked puts is a risky strategy. Instead, traders who believe that support near 173.00 will hold might consider a put credit spread, which defines risk while allowing them to profit if the pair remains above a certain level by expiration. This approach recognizes the potential for a dip but bets against a complete trend collapse. Create your live VT Markets account and start trading now.

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Japanese media report that Prime Minister Shigeru Ishiba’s government may lose its majority. The upcoming upper house by-elections this weekend are crucial for testing Ishiba’s leadership and the viability of his minority government, which collaborates with Komeito. The government faces declining approval ratings and growing public worries about living costs and the economy. While it’s unlikely the ruling coalition will lose power altogether, unfavorable election results could threaten Ishiba’s role.

Opposition and Economic Policies

The opposition is advocating for tax cuts and increased fiscal stimulus, which could gain momentum if the election results favor them. These results will affect economic policies, budget discussions, and the balance of power in the Diet. If spending-focused or populist policies gain support, this could impact the markets. Nikkei has pointed out these concerns, highlighting the vulnerability of Ishiba’s coalition in the current political climate. We view the political shifts in Tokyo not as a danger but as a unique opportunity. The market seems to be overlooking this weekend’s by-elections, and now is the time to prepare for increased volatility. Ishiba’s cabinet approval rating recently dropped to just 25.7%, the lowest in his term, making the chance of a political upset more likely than current market prices indicate. This situation isn’t just show; it could directly influence monetary and fiscal policy changes.

Market Strategy and Implications

The Nikkei Volatility Index, the VXJ, has been steady at a low 17. This is an inexpensive form of protection, making it an ideal time to buy volatility before the results. Any indication that Ishiba’s coalition is weakening will encourage the opposition and their calls for more spending. Historically, similar policy directions have negatively impacted the yen while benefiting equities. A poor performance by the ruling coalition could push the USD/JPY pair past the critical 160 level, a psychological threshold that the Ministry of Finance is striving to maintain. Our strategy centers on options, not predicting a specific outcome but recognizing that the result will likely lead to significant market movement. A weaker government would mean increased spending, delaying any strong measures from the Bank of Japan as it grapples with persistent inflation above its 2% target, with core CPI reaching 2.5% in May. This scenario favors long Nikkei 225 calls and long USD/JPY calls. Conversely, if the ruling coalition surprises with a strong showing, it may suggest a mandate for fiscal responsibility, allowing the Bank of Japan to move towards normalization, which would likely lead to a stronger yen and lower Nikkei. Given these two possible outcomes, executing a long straddle on Nikkei futures or a strangle on the USD/JPY is a smart move. This strategy allows us to benefit from significant price swings in either direction. The market has presented a low implied volatility gift just before an event that could drastically change Japan’s economic landscape. Create your live VT Markets account and start trading now.

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