Encoding and predicting aversive events are critical functions of circuits that support survival and emotional well-being. Maladaptive circuit changes in emotional valence processing can underlie the pathophysiology of affective disorders. The lateral habenula (LHb) has been linked to aversion and mood regulation through modulation of the dopamine and serotonin systems. We have defined the identity and function of glutamatergic (Vglut2) control of the LHb, comparing the role of inputs originating in the globus pallidus internal segment (GPi), and lateral hypothalamic area (LHA), respectively. We found that LHb-projecting LHA neurons, and not the proposed GABA/glutamate co-releasing GPi neurons, are responsible for encoding negative value. Monosynaptic rabies tracing of the presynaptic organization revealed a predominantly limbic input onto LHA Vglut2 neurons, while sensorimotor inputs were more prominent onto GABA/glutamate co-releasing GPi neurons. We further recorded the activity of LHA Vglut2 neurons, by imaging calcium dynamics in response to appetitive versus aversive events in conditioning paradigms. LHA Vglut2 neurons formed activity clusters representing distinct reward or aversion signals, including a population that responded to mild foot shocks and predicted aversive events. We found that the LHb-projecting LHA Vglut2 neurons encode negative valence and rapidly develop a prediction signal for negative events. These findings establish the glutamatergic LHA-LHb circuit as a critical node in value processing.