The USDJPY pair is nearing a critical resistance level as attention turns to the BoJ and FOMC decisions. The USD regained ground without a clear catalyst, while the market awaits new drivers for a sustained trend. The “short US dollar” trade dominates, needing a noteworthy event for expectations of additional rate cuts.
Tokyo’s lower-than-expected CPI figures didn’t assist the JPY, as a rate hike by year-end was already anticipated after the US-Japan trade deal. Further appreciation requires weak US data to bolster dovish bets on the Fed, or higher Japanese inflation to imply more rate hikes. Political shifts, like fiscal support, could lead to expectations of stronger economic activity and more rate hikes.
Technical Analysis
On the daily chart, USDJPY approaches the 148.30 resistance. Sellers may act around this level, aiming for a drop to the 142.35 support, while buyers seek a break higher toward 151.20 resistance. In the 4-hour chart, minor support exists at 147.00. Buyers may enter here, targeting a rally, while sellers aim for a drop to 142.35.
In the 1-hour chart, an upward trendline supports bullish momentum. Buyers may lean on it to target new highs, while sellers look for a break toward 147.00. Upcoming catalysts include US economic data and BoJ and FOMC rate decisions, which could influence market movements.
With the major central bank meetings this week, we see derivatives markets pricing in a near 100% chance of the Fed holding rates steady. However, the CME FedWatch Tool shows a more than 40% probability of a rate cut by the March meeting, making the upcoming statement critical for direction. This suggests using options to hedge against a surprisingly hawkish tone that could push the pair higher.
On the other side of the pair, Japan’s recent national core inflation slowing to 2.3% in December reinforces the view that a major policy shift is not imminent. We believe this gives the central bank room to wait, likely until the spring wage negotiations, before ending its negative interest rate policy. Therefore, buying short-dated call options could be a way to profit from a potential disappointment for yen bulls this week.
Historical Interventions
As the currency pair tests the upper end of its range, we should remember the Ministry of Finance’s verbal and physical interventions back in late 2022 when the pair crossed the 150 level. This history suggests that even if we break the initial resistance, significant follow-through towards the next major level will likely be met with official warnings. Traders could consider selling call spreads above 150 to capitalize on this historically capped upside.
The packed schedule of U.S. economic data, including job openings and the employment report, introduces significant event risk. We anticipate a spike in implied volatility leading into these releases, especially with the non-farm payrolls report. A long straddle or strangle strategy could be an effective way to trade the potential for a large price move in either direction, irrespective of the outcome.
We must remain aware of the positioning imbalance, which shows a significant speculative bet against the greenback. According to recent CFTC data, net short positions on the dollar remain substantial, creating the risk of a sharp rally if this week’s data or central bank tone is stronger than expected. This potential for a short squeeze means any bearish positions should be protected with tight stop-losses or by purchasing out-of-the-money calls as a hedge.
