USD/JPY traded near 157.95 on Thursday, up 0.05% on the day and close to a two-week high. The move followed a firm US Dollar after recent macroeconomic news.
US officials said the meeting between President Donald Trump and President Xi Jinping was positive. Talks covered wider access for US firms in China, more Chinese investment in the US, and keeping the Strait of Hormuz open.
US inflation data also supported the Dollar. The Producer Price Index rose 6% year on year in April, compared with 4.3% previously and above the 4.9% forecast, while the monthly rise was 1.4% versus a 0.5% expectation.
The data added to pricing for higher-for-longer US interest rates, with fewer expectations for cuts this year. Some market participants are also considering the chance of a rate rise before year-end.
In Japan, the Yen drew support from expectations of tighter policy. The Bank of Japan Summary of Opinions showed several policymakers considering a rate rise as soon as the next meeting, and BBH estimates markets price about a 75% chance of a June hike.
Attention later turns to the US April Retail Sales report for hints on spending and the Federal Reserve’s next steps.
Given the high US inflation and the potential for the Bank of Japan to raise rates, we are seeing a classic setup for high volatility in USD/JPY. The Cboe’s USD/JPY volatility index (JYVIX) has already climbed to 12.5, its highest point since the market jitters of late 2024, signaling traders are bracing for a large price swing. This environment makes strategies like buying option straddles, which profit from a significant move in either direction, a prudent approach for the coming weeks.
The strength of the US dollar, powered by producer price inflation hitting a four-year high of 6%, remains the dominant trend for now. We’ve seen the US 2-year Treasury yield push back above 5.15% this week, which continues to pull capital toward the dollar. For those wanting to follow this momentum, buying USD/JPY call options with a 160 strike expiring in June offers a way to participate in further gains while capping potential losses.
However, the risk of a sudden yen recovery is significant and should not be ignored. We all remember how the yen strengthened rapidly in late 2025 after the Bank of Japan simply tweaked its policy language, so an actual rate hike could cause a much larger move. To guard against this, purchasing out-of-the-money USD/JPY put options with a 155 strike can serve as a cost-effective insurance policy for any long positions.
All eyes are now on the upcoming US retail sales data. After the unexpectedly high PPI reading, economists are watching closely, with consensus expecting a 0.4% rise; a stronger number could solidify the Fed’s hawkish stance and push the pair higher. Conversely, a weak report could signal that high rates are finally slowing the consumer, potentially triggering a reversal in the dollar’s recent strength.
