USD/JPY was trading near 163.60 on Wednesday, recouping early losses after the Federal Reserve’s decision. The Federal Open Market Committee kept the fed funds rate unchanged in a 3.50%–3.75% range, but the outcome was decided by a 9–3 vote, with three policymakers favouring a 25-basis-point increase. The Fed said economic activity was expanding at a solid pace, the Unemployment Rate had changed little, and inflation remained elevated versus its 2% objective, while it also pointed to elevated uncertainty linked in part to the conflict in the Middle East and to supply shocks such as higher energy costs.
On a four-hour view, the pair was quoted at 163.59 and held above the 100-period Simple Moving Average near 162.75, while trading just below the 20-period SMA around 163.73. The Relative Strength Index sat near the 50 mark at 49, indicating balanced momentum after a pullback. Resistance was flagged at 163.63, then 163.70 and 163.73, ahead of 163.90, while support was seen at 163.45 and then 162.75.
Fed Policy and USD/JPY Outlook
The Federal Reserve’s recent decision to hold rates at 3.50%–3.75% with three hawkish dissents suggests that US interest rates will stay elevated. We expect this hawkish stance to keep the US Dollar strong against the Yen, especially as energy-driven inflation risks persist. Recent data shows US core inflation remains stubborn at 2.7%, reinforcing the view that the Fed is not done tightening.
Derivative Strategies for USD/JPY
For derivative traders, we recommend using bull call spreads on USD/JPY to capture potential upside while strictly limiting risk. The currency pair is currently testing immediate resistance near 163.73, with solid technical support at the 100-period Simple Moving Average of 162.75. Setting the lower strike of a call spread near 163.00 and the upper strike near 164.50 allows us to profit from a breakout toward new highs.
Since implied volatility in USD/JPY option chains is hovering at a modest 8.5%, buying options is relatively inexpensive right now. We suggest buying short-dated knock-out barrier options with a protective trigger set just below the key 162.75 support level. This protects our premium from being wiped out if the Bank of Japan decides to intervene unexpectedly, a move that historically has caused sudden, sharp drops of over 300 pips.
