USD/JPY Implied volatility rises to the occasion ahead of BOJ

President Trump made it clear at Davos he is not here to encourage free markets, stating he wants lower interest rates for the US and globally, and lower oil prices from Saudi Arabia. Crude oil prices were lower for a fifth day, with WTI crude falling to just shy of $74 and the S&P 500 reach a record high of 6118.72.

With the BOJ interest rate decision on tap, it is no surprise to see the 1-day implied volatility band for USD/JPY rise to 250% of its 20-day SMA. This hints at a potential 115-pip move (up or down) and a closing range of ~230 pips. But we can also see that implied volatility for USD/JPY is trending higher across multiple timeframes which points to turbulent times ahead.

Economic events in focus (AEDT)

We have a busy calendar today, which kicks off the BOJ’s interest rate decision. While a 25bp hike is expected to take rates to 0.5%, the BOJ have a knack of surprising markets via shock and awe, or mere disappointment. Therefore, take nothing for granted. But should the BOJ deliver a hawkish 25bp hike, the yen should strengthen and weigh on USD/JPY. Whereas anything less than a 25bp hike (such as a 15bp or zero), the USD/JPY could rally – with the level of disappointment deciding just how far it could bounce.

We’ve likely seen the best of the WEF meetings of Davos with Trump’s video call on Thursday, but headline risks are to remain in place regardless as comments are made (officially or via ‘sources’).

We then move on to the first set of flash PMIs for 2025, which help shape expectations for growth, employment and inflation for the respective economies.

• 10:30 – JP CPI
• 11:01 – UK consumer sentiment
• 11:30 – JP flash manufacturing and services PMIs
• 13:00 – NZ credit card spending
• 14:00 – BOJ interest rate decision (+25bp expected, but times may vary)
• 17:30 – BOJ Press conference
• 19:00 – World Economic Forum Annual meeting
• 19:30 – DE flash manufacturing and services PMIs
• 20:00 – EU flash manufacturing and services PMIs
• 20:25 – UK flash manufacturing and services PMIs
• 01:45 – US flash manufacturing and services PMIs
• 02:00 – US consumer sentiment and inflation expectations (Michigan University)

USD/JPY technical analysis:

I outlined a scenario last week where USD/JPY could fall towards 153. While that remains a possibility, we need a hawkish BOJ today to make it happen sooner than later. But we have seen a clear momentum shift lower as part of a first corrective wave, and prices now appear to be in a bearish consolidation.

The 1-hour chart shows prices holding above a high-volume node (HVN) at 155.67, and given the increase of the cumulative volume delta this week, (more bids than offers) it suggests buying pressure for USD/JPY. So unless the BOJ deliver a hawkish hike, perhaps a bounce higher is on the cards today. At which point I will review with fresh eyes next week for its potential to top out and make its next leg lower towards 153.

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge

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