US Dollar Weakness and Fed Policy
Alongside, the US Dollar faces reduced strength as observers weigh the Federal Reserve’s monetary policy outlook up to 2026. Data indicates a 64.3% probability that the Fed will cut interest rates at least twice by the end of 2026. The Fed’s dot plot projects the Federal Fund Rate falling to 3.4% by 2026, implying one more cut from the current levels of 3.50%-3.75%.
The Tankan Large Manufacturing Index offers insights into Japan’s economic conditions, heavily influenced by its manufacturing and export-oriented growth. A result above 0 signals positivity for the JPY, indicating strong manufacturing performance.
With USD/JPY testing the 155.00 level, we see a clear signal of Japanese Yen strength driven by a positive economic outlook. The Tankan survey’s four-year high suggests a robust manufacturing sector, strengthening our belief that the Bank of Japan will proceed with its rate hike this Friday. This shift in sentiment makes shorting the dollar against the yen an attractive position.
To add to this, Japan’s national Core CPI for November recently came in at 2.9%, remaining stubbornly above the BoJ’s 2% target for over a year. This persistent inflation provides the central bank with a clear mandate to tighten policy. We remember the Tankan index hitting similar strong levels back in late 2021, which preceded a major shift in global monetary policy.
Strategy for USD/JPY
On the other side of the trade, the US Dollar is weakening as we anticipate the Federal Reserve will begin cutting rates in 2026. The market is pricing in at least two cuts by the end of that year, a view that will gain momentum if tomorrow’s Nonfarm Payrolls data comes in weak. Consensus forecasts are for a modest 150,000 jobs added in November, a slowdown from the 162,000 seen in October.
Given this setup, derivative traders should consider buying USD/JPY put options to capitalize on a further decline. Options with strike prices around 154.00 or 152.50 expiring in late January 2026 could offer significant upside. This strategy allows us to profit from a falling USD/JPY while strictly defining our maximum risk.
It’s a stark reversal from the situation we observed through 2022 and 2024, when we were constantly watching for Ministry of Finance intervention to stop yen weakness past the 150 level. Now, official policy from the Bank of Japan is the primary driver of yen strength. The narrative has completely flipped from fighting a weak yen to supporting a strong one.
With major event risk from both the US NFP report and the BoJ policy meeting this week, implied volatility is elevated. Buying put options is a prudent way to express a bearish view on USD/JPY. It protects us from any unexpected policy surprise from the BoJ that could cause a sharp, unfavorable reversal.
