USD\/JPY slipped back after small prior-session gains, trading near 163.70 in Asian hours as oil\u2019s rebound and renewed Middle East hostilities kept inflation risks in focus, a backdrop that can weigh on the Japanese Yen given Japan\u2019s status as a major net oil importer. Attention has also turned to incoming Tokyo data: Tokyo CPI excluding fresh food is forecast to rise to 1.7% year on year in July from 1.6%, while the prior headline rate was 1.7% and CPI excluding both food and energy stood at 1.9%. Japan\u2019s unemployment rate is expected to hold at 2.5%.<\/p>\n
The US Dollar also found support from widening risk aversion after reports of an Iranian attack on US troops, with multiple ballistic missiles fired towards a US base in Jordan at around 5:45 pm ET; the US military said the IRGC missiles were intercepted. Markets are also positioned for the Federal Reserve to keep rates unchanged, yet pricing implies a 30.5% chance of an immediate hike and, further out, a 76.6% probability of a rise in September.<\/p>\n
We recommend that derivative traders position themselves for increased volatility as USD\/JPY hovers near the critical 163.70 level. Since Japan imports more than 95% of its oil, any further rise in global crude prices, which are flirting with the $85 per barrel mark, will put heavy pressure on the Yen. We suggest using long call options on USD\/JPY to capture potential upside if Middle East tensions keep driving energy costs higher.<\/p>\n
At the same time, we must closely watch Tokyo’s upcoming inflation data, where core CPI is expected to edge up to 1.7%. Historically, rising Japanese inflation has prompted sudden Bank of Japan policy shifts, which can spark rapid Yen short-squeezes. To manage this risk, we favor using ratio put spreads on USD\/JPY to protect against a sudden drop if the inflation print triggers a hawkish Japanese response.<\/p>\n
Meanwhile, the US side of the equation is highly unpredictable, with federal funds futures pricing in an unusual 30.5% chance of an immediate interest rate hike. This hawkish momentum is reinforced by a 76.6% probability of a rate hike in September, keeping US Treasury yields elevated. We believe traders should buy short-term USD call options to profit from a stronger greenback if the Federal Reserve leans into this hawkish narrative.<\/p>\n\n\n\n