USD/JPY bulls need to show more enthusiasm to drive it beyond 155, or risk it sliding.
OIS odds for a Bank of Japan rate hike on Thursday remain below 20%, following earlier reports suggesting that central bankers will maintain a patient approach to tightening policy. Short-dated yen calls have been purchased to hedge against an unexpected hike, although Japanese officials have been keen to avoid surprising the market after tightening in July.
Open interest in yen futures reveals modest short positioning after recent quarterly rolls. These shorts were mainly built amid reflation trades in December, which saw increases in gold, equities, and Treasury 10-year yields.
Despite a positive mood, market sentiment remains cautious about the upcoming Fed and BOJ decisions. Overnight volatility stands at 25%, or a 160-pip breakeven. With USD/JPY currently at 153.75, option buyers would need to see the pair dip below the daily cloud top at 152.65 or rise above the key pivot level of 155 to realize gains. For dollar bulls, the pair must hold above the 152.17-152.31 range, where the 21-DMA, 55-DMA, and 200-DMA converge — marking the outer limits of the breakeven zone.
A close outside this implied 152.15-155.35 range seems unlikely, as one-week implied volatility is decreasing, anticipating a post-decision drop in market risk. Longer-term skews are gradually shifting in favor of the yen, likely in anticipation of BOJ rate hikes and Fed cuts in 2025, which could bolster the Japanese currency. Analysts also expect the yen to strengthen late next year.
For USD/JPY to build upward momentum, this bearish mindset needs to shift. A surprise close above 155 this week would be a positive step in that direction.
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(Robert Fullem is a Reuters market analyst. The views expressed are his own.)
((robert.fullem@thomsonreuters.com;))
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