USD/JPY extended its advance for a fourth consecutive session, trading near 162.60 in European hours on Tuesday. Gains were framed against a softer tone in the US Dollar as risk aversion eased following diplomatic signals on Iran, after officials said they had received mediator proposals aimed at reducing tensions with the United States; separate reports pointed to a possible 10-day ceasefire.
Axios reported that President Trump is weighing whether to pursue a temporary ceasefire to reopen the Strait of Hormuz or proceed with a full-scale joint military campaign with Israel, while US forces continue to assemble in the region as talks continue. In Japan, Prime Minister Sanae Takaichi reiterated an emphasis on market trust and fiscal sustainability, while setting targets for real growth above 1% and nominal growth above 3% as soon as possible, alongside aspirations for stronger longer-term momentum. Attention then turns to Japan’s June National CPI release on Friday, with the core CPI forecast at 1.6% year-on-year versus 1.4% in May, as markets assess the Bank of Japan policy outlook.
Derivative Positioning Amid Easing Geopolitical Risk and Rising Japanese Inflation
We advise derivative traders to position for a potential pullback in the USD/JPY pair from its current peak of 162.60 over the coming weeks. The combination of easing Middle East tensions and rising Japanese inflation creates a strong fundamental case for a downward correction. To capitalize on this, we recommend buying near-term put options or establishing bear put spreads to limit premium costs while capturing the downside.
Historically, the US Dollar thrives on geopolitical uncertainty, but emerging talks of a 10-day ceasefire in the Strait of Hormuz are actively dampening safe-haven demand. If these diplomatic efforts succeed, the unwinding of long-dollar positions could trigger a rapid descent. We believe holding long USD call options at these multi-decade highs carries an unfavorable risk-to-reward ratio.
Japan CPI Prospects and the Risk of Government Intervention
On the Japanese side, the upcoming National CPI data is expected to show core inflation rising to 1.6% from 1.4% in May. When Japanese inflation previously accelerated in 2024, it prompted the Bank of Japan to exit its negative interest rate policy, sparking sharp rallies in the Yen. We expect a strong inflation reading this Friday to renew hawkish bets, putting further downward pressure on the currency pair.
Furthermore, we must respect the risk of direct government action, as Japanese authorities historically defend these extreme exchange rates. During similar currency weakness in late April and May of 2024, the Ministry of Finance spent a record 9.8 trillion yen (around $62 billion) in direct interventions to prop up the Yen. Given this precedent, we suggest using defined-risk derivative strategies to protect against sudden, volatile downward moves.
