USD/JPY fell 0.30% on Wednesday to about 156.80 as the US Dollar came under pressure after softer US inflation readings. The headline PCE Price Index held at 3.4% in August versus a 3.7% forecast, while July was revised to 3.4% from 3.7%. Core PCE stayed at 3% year on year against a 3.3% estimate and July was revised to 3% from 3.3%; on the month, headline PCE rose 0.3% and core PCE 0.2%. That inflation backdrop sits alongside firmer activity data: ADP showed 90K private jobs added in September versus 70K expected, following an upwardly revised 36K in August, while annualised Q2 GDP was revised to 2.2% from 1.5%, above a 1.5% consensus and up from 2.1% in Q1.
Rate expectations shifted, with CME FedWatch putting October hike odds at about 35%, down from nearly 51% a day earlier and 71% a week ago, while December odds rose to nearly 60% from 49.4%. The Dollar Index slipped 0.21% to around 101.20 after touching 101.03. On the one-hour chart, USD/JPY was near 156.84, below the 100-period SMA at 157.59 and the 200-period SMA at 157.58, with RSI(14) around 42; resistance sits at 157.58–157.59, then 158.00 and 159.00, while support is seen at 156.50 and 155.50.
Short-Term Bearish Momentum and Options Strategies
With USD/JPY slipping to around 156.80 today following the weaker US PCE inflation data, we believe derivative traders should prepare for short-term bearish momentum. The drop below the key moving averages near 157.59 indicates that sellers currently control the near-term direction. We suggest focusing on short options strategies or buying put options, targeting the immediate support floor at 156.50.
The sudden drop in October rate hike expectations to 35% has weakened the Greenback, but we must not ignore the rising 60% probability of a December hike. This shifting timeline is highly reminiscent of the volatility in late 2024 when shifting rate expectations caused USD/JPY to plunge from over 161 down to the 140 level within a few months. We recommend using calendar spreads to capitalize on this delayed tightening expectation by selling short-term volatility and buying longer-dated contracts.
Medium-Term Range Trading and Risk Management
Despite softer inflation, the resilient US GDP growth of 2.2% and a strong 90K ADP jobs report show that the underlying economy remains robust. Historically, strong growth data limits how far the US Dollar can fall, which means USD/JPY is unlikely to experience a total meltdown. We advise setting tight stop-losses around the 155.50 support level to protect short positions from sudden upside reversals driven by upcoming jobs data.
Given the conflicting signals of cooling inflation and strong growth, we expect the currency pair to trade within a consolidated range between 155.50 and 158.00 in the coming weeks. Derivative traders can look to write out-of-the-money strangle options to collect premium while the market digests this macroeconomic data. We should also monitor any sudden pushes toward the 159.00 resistance level as an excellent opportunity to buy cheap protective put options.
