USD/JPY experienced a rise due to increasing U.S. yields and an earthquake in northeast Japan. Markets have assigned a 90% likelihood to a Bank of Japan 25bp rate hike next Friday. Currently, the pair stands at 156.16, with near-term trends favouring the USD.
Short-term USD/JPY movement is driven by concerns over a hawkish Federal Reserve and dovish Bank of Japan. A substantial recovery in JPY depends on the BoJ’s stronger guidance and policymakers’ fiscal responsibility. A weaker USD and US rate environment would also be beneficial. Presently, fears of a hawkish Fed cut and a dovish BoJ hike offer support to USD/JPY.
Support And Resistance Levels
Daily momentum indicates a slightly bearish trend, though the RSI decline is tempered. Key support levels are 155.70, 154.40, and 151.60, with resistance at 156.70, 157.90, and 158.87. The information was adjusted on 9 December to clarify that short-term USD/JPY is influenced by concerns over a hawkish Fed and dovish BoJ.
With the USD/JPY trading at 156.16, the near-term trend appears to favor a stronger dollar. Recent U.S. Core PCE inflation data from last month came in at a stubborn 3.1%, keeping the Federal Reserve on a hawkish path. This contrasts sharply with Japan’s situation, where a dovish outlook persists.
The Bank of Japan is widely expected to deliver a 25 basis point rate hike on December 19, a move already 90% priced in by the markets. However, we believe this will be a “dovish hike,” as the path for further tightening seems unclear, especially after the recent earthquake. This event may prompt more government spending, which could weaken the yen further.
Trading Strategies And Risks
For derivative traders, this suggests that buying near-term USD/JPY call options could be a viable strategy. Targeting strike prices around the next resistance levels of 157.90 and the 2025 high of 158.87 offers a way to capitalize on the expected upward drift. A bull call spread could also be used to limit costs in this environment of rising yields.
We must remain cautious of a key risk: intervention from Japan’s Ministry of Finance, which we saw multiple times back in 2024 when the pair neared the 160 level. To hedge against a sudden, sharp drop caused by intervention, holding some out-of-the-money put options could provide necessary protection. This creates a balanced position ahead of potentially volatile weeks.
Implied volatility on USD/JPY options has ticked higher with the U.S. 10-year Treasury yield pushing past 4.35% and the BoJ meeting just over a week away. This elevated volatility makes selling options premium through strategies like iron condors risky but increases the potential payout for directional bets. Traders should expect price swings around key announcements.
