The yen held to a narrow band near 159.30 per US dollar in European trade on Thursday, with USD/JPY consolidating ahead of Federal Reserve Chair Kevin Warsh’s speech at the Jackson Hole Symposium on Friday. The US Dollar Index hovered around 99.15 after extending gains on Wednesday, following July US Personal Consumption Expenditure data that pointed to sticky inflation. Headline PCE rose to 3.7% year on year versus a 3.6% consensus, while core PCE was 3.3% year on year, in line with forecasts, a combination that coincided with firmer US Treasury yields and support for the dollar.
In Japan, attention is moving beyond the Bank of Japan’s September meeting, where markets anticipate a 25 basis point rate rise to 1.25%. A Reuters poll covering 17-24 August showed 57% of economists expecting a September hike, compared with 5% in July. On charts, USD/JPY was at 159.34, capped by the 20-day EMA at 159.47, while the RSI stood at 46.7 below the 50 mark; resistance is seen around 159.47 and, with little nearby support mapped, focus turns to prior swing lows if the pair slips further.
Short-Term Volatility and Positioning Ahead of the Jackson Hole Symposium
With Fed Chair Kevin Warsh speaking tomorrow at the Jackson Hole Symposium, we recommend derivative traders focus on short-term USD/JPY volatility. Implied volatility for one-week USD/JPY options typically rises by 15% to 20% ahead of this symposium, making long straddles highly attractive. Given that USD/JPY is currently consolidating tightly around 159.30, a sharp breakout is likely once the Fed clarifies its stance on the sticky 3.7% July PCE inflation.
Portfolio Strategies Around the Bank of Japan Meeting
We must also position our portfolios for the Bank of Japan’s meeting on September 18, where 57% of surveyed economists now forecast a rate hike to 1.25%. Recent CFTC positioning data shows leveraged funds have rapidly unwound JPY shorts, reducing net-short contracts by over 25,000 in recent weeks. For longer-term plays, we favor buying JPY call options to capitalize on this narrowing interest rate differential between the US and Japan.
On the charts, we advise keeping a close eye on the 20-day exponential moving average at 159.47, which is currently acting as a cap on any upside. If USD/JPY fails to breach this level and the Relative Strength Index stays below 50, entering short futures positions is highly viable. Historical precedents suggest that when technical resistance aligns with a hawkish BoJ shift, the pair can quickly drop by 200 to 300 pips toward prior swing lows.
