USD/JPY was near 153.70 on Friday, lower on the day after jumping above 154.50 in the wake of the US inflation print, before reversing within hours and drifting back towards the bottom of its recent range following a slide from the mid-155s. US CPI held at 3.4% year on year in August, matching July and expectations, while prices rose 0.4% month on month versus 0.1% previously. Core CPI increased 0.3% on the month, above the 0.2% forecast, though the annual core rate eased to 2.4% from 2.5%.
The Dollar’s initial lift faded as the Yen strengthened, with markets pricing a central bank rate rise next week of 25 bps to 1.25%, which would take Japanese borrowing costs to their highest level in more than three decades. On the charts, the pair traded at 153.69, below the 20-day SMA at 157.65 and the 100-day SMA at 159.68, while the RSI sat at 29.35. Resistance levels were cited at 154.40 and 155.99, with support at 153.55 and 153.26.
Derivative Positioning and Volatility Outlook
We suggest derivative traders prepare for heightened volatility in the USD/JPY pair over the coming weeks as the market prices in a landmark Bank of Japan interest rate decision. Following the recent US CPI release, the pair has slumped to around 153.70, heavily weighed down by a strengthening Yen. Historically, when the Yen builds such strong momentum ahead of a key policy meeting, option implied volatility tends to spike significantly.
With the Relative Strength Index (RSI) hovering in oversold territory at 29.35, we recommend avoiding chasing the spot market lower and instead utilizing bear put spreads. This strategy limits premium costs while positioning us to profit if USD/JPY breaks below the immediate support level of 153.55 toward 153.26. Looking back at historical BoJ rate hikes, like the historic policy shift in March 2024, initial Yen gains often see volatile, two-way swings before a clear trend emerges.
Strategy and Technical Levels for Relief Rallies
To capitalize on temporary relief rallies, we should look to establish bear call spreads near the 154.40 and 155.99 resistance zones. These levels are well below the 20-day Simple Moving Average at 157.65, which has historically acted as a strong ceiling during major downward trends. Quantitative data shows that when a currency pair trades this deep below its 100-day moving average, recovery attempts are usually met with aggressive selling.
As the Bank of Japan prepares to potentially raise its benchmark rate to 1.25% next week, Japanese borrowing costs will hit their highest level in over three decades. For futures traders, we advise maintaining short-biased positions but setting tight stop-losses just above the 154.50 mark to protect against sudden short squeezes. Utilizing long straddle options ahead of the rate announcement can also help us capture massive price swings regardless of which direction the market ultimately breaks.
