The USD/JPY pair is currently maintaining its position within the 155.50–156.00 range, having tested levels above 155.60 during the early Asian session and continuing to rise as the European session progresses. In the past week of trading, the pair has experienced a modest decline of approximately 1%, which can be considered a minor pullback in light of the preceding rally. The current spot price continues to hold well above the 155.00 level, which has been regarded as a near-term support by numerous macro and real-money accounts. Price action remains straightforward: in light of a dovish US inflation surprise, a Fed rate cut that has already been implemented, and a fully priced 25 bp hike from the BoJ, the yen has failed to achieve a significant recovery. The overarching bullish trend in USD/JPY continues to hold on higher timeframes, despite a noticeable cooling in momentum.
The dynamics of USD/JPY are influenced by a conflict between disappointing economic indicators and the Fed’s persistently cautious outlook. In November, the headline CPI registered at 2.7% year-on-year, falling short of expectations that were approximately 3.1%, while core readings were also weaker than anticipated. The recent print has prompted a swift adjustment in the Fed curve: markets currently estimate a 73–76% likelihood that the January 28, 2026 meeting will maintain rates at 3.75%, while the probability of a rate cut to 3.50% on March 18 has increased to approximately 45–46%, indicating an earlier expectation for easing that was previously anticipated for late Q1 or Q2. Despite that shift, the US Dollar Index remains only slightly elevated at approximately 98.5, showing that easing inflation is gradually eroding the “higher for longer” narrative. Fed Governor Christopher Waller has emphasized that the FOMC is not in a hurry to implement cuts and seeks more definitive evidence that inflation is under control, while Atlanta Fed President Raphael Bostic has stated that inflation remains a greater concern than the labor market. This creates a macro environment where data supports earlier easing through 2026, while communication attempts to temper expectations, leaving USD/JPY with diminishing medium-term rate support but intact short-term carry appeal. This week’s Bank of Japan decision is pivotal for USD/JPY as it marks a further departure from the ultra-easy regime that has supported the pair’s uptrend for years. Expectations center on an increase from 0.50% to 0.75%, a three-decade peak, reflecting the transition that began with the exit from negative rates in 2024. Japanese inflation data supports this move, with CPI rising to approximately 3.0% from 2.7% in August, while the growth backdrop remains fragile, as revised Q3 GDP showed a contraction of 0.6% versus the initial -0.4%. Governor Kazuo Ueda faces a delicate balance: proving commitment to inflation control without undermining domestic demand or sovereign confidence. Markets see the 25 bp hike as assured, with focus on whether Ueda signals a path toward further hikes into mid-2026; a clear tightening bias would support the yen, while a cautious, one-and-done tone would likely limit its impact and leave USD/JPY exposed to renewed upside.
Structurally, USD/JPY remains supported even amid BoJ normalization. The US–Japan 10-year yield spread still exceeds 350 basis points, sustaining the carry trade despite the Fed’s September cut and the anticipated BoJ hike. Investors continue to be compensated for holding dollars against the yen, capping the scale of yen rallies. Domestic fiscal concerns in Japan further constrain expectations for aggressive tightening, given high public debt and political resistance to consolidation. Memories of 2024 interventions near the 160 level remain fresh, and with USD/JPY comfortably above 155 and yen weakness persisting since Takaichi’s LDP leadership victory, intervention risk would rise quickly if the pair approaches the high-150s again. This combination of yield spreads, fiscal limits, and intervention risk explains why spot remains resilient rather than declining ahead of the BoJ decision. Short-term price action reflects a market with entrenched buyers and a gradually strengthening opposing force. USD/JPY climbed toward 155.60 in early Asian trade and approached 156.00 during European hours as the dollar found support ahead of CPI and following Waller’s remarks, while remaining consistently above 155.00 despite weak US payrolls and a fully priced BoJ hike. This resilience underscores a buy-the-dip dynamic. However, the pair has retraced nearly 1% over the past week, with rising selling interest as traders brace for a firmer BoJ and softer US inflation. Technically, resistance is concentrated near 157.479, while downside pivots sit at 154.313 and the critical long-term trendline support at 150.831. Momentum indicators show cooling strength: RSI is drifting toward 50, MACD is marginally negative, and price is gravitating toward the 50-period moving average, signaling waning upside momentum though the broader bullish structure remains intact above 150.83.
The next move in USD/JPY hinges on a two-step sequence involving US inflation dynamics and the BoJ decision. With CPI at 2.7% and core inflation still sticky, markets now expect the first cut to 3.50% in 2026 as early as March, while Fed communication appears aimed at moderating expectations rather than contradicting data. In Japan, a hike to 0.75% with guidance toward “further gradual hikes” would likely be insufficient on its own to generate sustained yen strength, keeping USD/JPY above 155 and potentially allowing a retest of 157.5 if US yields hold. Conversely, a stronger inflation-focused message from Ueda or greater acceptance of yen appreciation could accelerate rate-gap compression, pushing the pair toward 154.3 or lower. Any sharp rally toward the high-150s would heighten intervention risk, increasing volatility and demanding rapid positioning adjustments.