USD/JPY edged higher on Friday in thin conditions around the US Independence Day holiday, with the US Dollar steadying against the Japanese Yen after Thursday’s drop triggered by softer US labour data. The pair was trading near 161.30 at the time of writing, having earlier touched a two-week low of 160.49 in the Asian session. The setback followed a weaker US Nonfarm Payrolls release, which pushed down US Treasury yields as markets reassessed how long the Federal Reserve can keep policy restrictive; the Dollar later recovered as traders adjusted positioning after the initial sell-off.
On a four-hour basis, USD/JPY sat at 161.29, effectively on the 100-period SMA at 161.29, which points to a neutral near-term setup as price consolidates. The 20-period SMA at 161.91 remains above spot and is acting as resistance, while the RSI drifting towards the mid-40s suggests waning bullish momentum rather than oversold conditions. Immediate resistance is seen around 161.39 and then near the 20-period SMA at 161.91; support levels are marked at 161.12, followed by 160.90 and 160.79, with a sustained break lower favouring sellers.
Labour Data Reaction and Volatility Strategies
The weaker-than-expected Nonfarm Payrolls report, which showed job growth of only 155,000 against a consensus of 180,000, has shifted the landscape. We see the market pausing around the 161.30 level as it digests this news amid thin holiday trading. This consolidation presents an opportunity to use options to position for the increased uncertainty in the coming weeks.
Our primary view is that the path of least resistance for USD/JPY is now lower, as this data gives the Federal Reserve cover to pivot toward rate cuts. Futures markets are now pricing in a 75% probability of a rate cut by the September meeting, up from just 50% before the jobs report. We are therefore looking to buy put options with expirations in late July or August to position for a move toward the 158-159 range.
Support Levels, Volatility Selling, and Policy Risks
However, the price is holding firm above key support near 160.80, showing the market isn’t ready for a full-scale selloff just yet. This indecision makes selling volatility an attractive short-term play, such as using an iron condor or a short strangle centered around the 161.50 level. This position would profit from the pair remaining range-bound as we await next week’s crucial Consumer Price Index (CPI) data.
We must also remain vigilant about the risk of intervention from Japanese authorities, which historically has become a threat above the 160 level. A sudden move by officials could trigger a sharp drop, making outright short positions dangerous. Using defined-risk strategies like put spreads is our preferred way to manage this specific tail risk.
