USD/JPY held above 163.90 on Thursday, changing hands around 163.95 as the Dollar strengthened after US labour data surprised to the upside. Initial Jobless Claims fell to 187K in the week to July 18, versus forecasts of 212K and a revised 209K previously, marking the lowest reading since 1969. After the release, US Treasury yields rose and the Dollar Index added 0.4%, underpinning the move in the pair as markets weighed the implications for the Fed’s policy stance.
Attention then turns to Japan’s June National CPI due later Thursday. Core inflation, excluding fresh food, is expected at 1.6% YoY versus 1.4%, while the prior headline rate was 1.5% and the index excluding food and energy printed 1.8%. Technically, the pair remains above the 20-period SMA at 162.97 and the 100-period SMA at 162.28, while meeting resistance near 163.97 and showing an RSI around 80. Support levels are seen at 163.65, then 163.49 and 163.29.
Short-Term Caution and Option Hedges
We recommend derivative traders exercise caution with direct USD/JPY spot long positions despite the strong US labor data pushing the pair to 163.95. The Relative Strength Index (RSI) is currently hovering at a highly overbought level of 80 on the 4-hour chart, suggesting a near-term pullback is highly probable. Historically, similar overbought conditions in this currency pair have led to brief downward corrections of 100 to 150 pips before the broader uptrend resumed.
To hedge against the upcoming Japanese National CPI release, we should consider buying short-term put options on USD/JPY. If core inflation beats the 1.6% forecast, reviving memories of Japan’s unexpected inflation surges in early 2024, the Bank of Japan could signal faster rate hikes. A put option with a strike price around 163.00 would protect existing bullish positions while allowing us to profit if the Yen rallies sharply.
Strategies for USD Strength and Breakout Trades
Alternatively, we can capitalize on the US dollar’s strength by trading interest rate futures. The drop in US jobless claims to 187,000—a level not seen consistently since the late 1960s—strongly supports a “higher-for-longer” monetary policy. By selling SOFR futures expiring later this year, we can position ourselves to benefit as the market prices out potential Federal Reserve rate cuts.
For traders expecting a breakout above the 163.97 resistance, we suggest using knock-out call options with barriers set just below the 163.29 support level. This strategy limits our downside risk while keeping us positioned for a run toward the 165.00 mark if US Treasury yields continue their upward march. Historically, when the Dollar Index rises by 0.4% or more in a single session, the momentum tends to carry over into the following two weeks.
