The Japanese Yen has experienced a slight recovery from a recent two-week low against the US Dollar, buoyed by strong domestic data. Japan’s service-sector inflation rose for the second consecutive month in September, reaching 3.0%. This has reinforced expectations for potential gradual interest rate hikes by the Bank of Japan.

Japan’s new Prime Minister, Sanae Takaichi, is anticipated to continue expansionary spending policies, potentially restraining aggressive movements in the Yen. Economic uncertainties in the US and the upcoming two-day Bank of Japan meeting contribute to a cautious market sentiment. The US Federal Reserve’s decision this week could influence the US Dollar and its relationship with the Yen.

Inflation And Interest Rates

Data shows consumer inflation in Japan has exceeded the central bank’s 2% target for over three years, supporting the case for further tightening. In contrast, US September inflation data missed estimates with a 0.3% rise, hinting at an impending rate cut by the Federal Reserve. As the divergent policies of the Federal Reserve and Bank of Japan develop, this could support the Yen and limit upside potential for USD/JPY.

Technical levels for USD/JPY include potential support around 152.65 and resistance in the 153.25-154.80 range. The Bank of Japan’s Corporate Service Price Index, indicating inflationary pressures, rose to 3% in September.

Given the opposing forces at play, we expect significant volatility in the USD/JPY pair this week. On one hand, the Bank of Japan faces mounting pressure to tighten policy, supported by service-sector inflation hitting a high of 3.0%. On the other hand, the new Prime Minister’s preference for stimulus and a dovish Federal Reserve are creating powerful crosscurrents.

The 3.0% Corporate Service Price Index is notable, as it represents the fastest pace of corporate inflation we’ve seen since the post-pandemic price surges of 2024. This data point alone strengthens the case for the Bank of Japan to finally move away from its ultra-loose policy, a step it has hesitated to take for nearly two decades. Traders should be prepared for the BoJ to signal a more hawkish stance this Thursday.

Market Strategy And Considerations

In the US, inflation has clearly softened from the highs we saw a couple of years ago, with the latest 3.0% annual CPI reading missing expectations. Consequently, derivatives markets are now pricing in a more than 90% probability of a 25-basis-point rate cut from the Federal Reserve this Wednesday. This growing policy divergence between a potentially hiking BoJ and a cutting Fed is fundamentally bearish for the USD/JPY.

For the coming weeks, we should consider strategies that benefit from this expected volatility, such as buying straddles or strangles ahead of the central bank meetings. A directional bias would be to favor JPY strength, possibly by buying USD/JPY put options or establishing cautious short positions. A decisive break below the 152.00 handle would confirm this downward momentum, opening the door to the 151.00 level.

However, we must remain aware of the upside risks to the currency pair. Any indication that Prime Minister Takaichi’s dovish agenda is influencing the BoJ could weaken the yen, as could a finalized US-China trade deal that dampens safe-haven demand. A move above the 153.30 resistance level would suggest that bullish forces are taking control, targeting the 154.00 mark.

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