The USD/JPY cross is currently positioned between 157.7 and 158.2, reaching one-year highs and approaching the peak observed in January 2025. The price action indicates a clear and sustained uptrend: daily closes are consistently above the 21-day SMA near 156.5 and the 100-day SMA around 152.7. Additionally, momentum indicators such as RSI at approximately 62 and a positive MACD suggest that buyers maintain control of the market, rather than it being a result of exhausted short-covering. The market is currently positioned just beneath the 158.0–158.2 range, which has consistently limited upward movements since November. Should this resistance be breached, there is a notable opportunity for movement toward 160.0. The situation regarding the dollar is more complex than merely a narrative of a “strong USD.” The US Dollar Index has declined from its recent peak around 99.25, currently trading near 98.7 following a pullback of approximately 0.4%. This movement is influenced by a political shock involving a criminal investigation related to Fed Chair Jerome Powell and concerns regarding the central bank’s independence. The impact affected risk sentiment across various assets; however, it did not alter the fundamental macro trend that has bolstered USD/JPY for several months. The macroeconomic indicators continue to favor the dollar. In December, nonfarm payrolls increased by approximately 50k jobs, falling short of headline expectations. However, the unemployment rate decreased to 4.4%, and average earnings saw an acceleration to around 3.8% year on year. The figures that hold significance for the Fed are those. Markets have adjusted their rate-cut expectations for 2026 from the previously high dovish pricing, which is contributing to sustained elevated US yields and maintaining favorable rate differentials for the dollar against the yen.
The upcoming significant catalyst is the US CPI, as the market anticipates core inflation to be approximately 3.7%, with certain desks highlighting the potential risk of it reaching 3.8%. An increase in the print would compel traders to disregard the political distractions and refocus on the Fed’s inflation issue, which fundamentally favors USD/JPY. A softer CPI, in contrast, would provide bears with something tangible, but until that occurs, the most likely direction for the dollar remains neutral-to-supportive rather than distinctly bearish. The yen’s position in USD/JPY is characterized by inherent weaknesses and domestic uncertainties, rather than traditional safe-haven appeal. Geopolitical tensions in the Middle East and the Russia–Ukraine war have not resulted in significant, sustained inflows into JPY; rather, domestic factors are the primary influence. Initially, the political landscape in Japan exhibits instability. Markets are preparing for the potential scenario in which Prime Minister Sanae Takaichi may announce a snap lower-house election as soon as February. In the past, the period leading up to Japanese elections has typically resulted in a depreciation of the yen, as foreign investors hold off for clearer policy indications while domestic investors continue to move capital abroad in pursuit of higher returns. The current situation aligns with that pattern: in spite of headline risk, the yen continues to face challenges in gaining traction. Second, the anticipation for a robust tightening by the Bank of Japan has dissipated. At the beginning of 2025, markets engaged in the speculation of several rate increases moving into positive territory.
The situation has involved two cautious 25-basis point adjustments accompanied by a dovish outlook. For 2026, the consensus continues to anticipate further tightening; however, the extreme “shock and awe” scenario has dissipated. Japanese yields remain constrained at low levels, whereas US yields are elevated due to persistent inflation and a Fed that is less inclined towards dovish policies. Third, Japan is confronted with its own economic and strategic challenges. Supply chain tensions have intensified following China’s decision to limit exports of specific dual-use goods to Japan. The ongoing trend, influenced by years of external investments alongside substantial savings reserves, continues to favor capital outflow rather than repatriation. The context clarifies why, despite a decline in global risk sentiment due to Fed news, the yen only strengthens slightly and fails to maintain a widespread rally. The 160–161 zone serves as a crucial institutional anchor for the market at this time. Bank of America advises clients to view rallies toward 160–161 in USD/JPY as an exit opportunity rather than a new entry point, primarily due to the heightened risk of intervention at those levels. The bank holds a long-term bearish perspective on the yen, aligning with capital outflows and the cautious stance of the BoJ. However, it advises against increasing yen short positions above 160. The rationale for that call is firmly rooted in recent historical data. The previous occasion when USD/JPY maintained trading levels around or above 160 saw Japanese authorities transition from mere verbal warnings to direct intervention, resulting in sharp intraday reversals of 3–5 yen. Market participants recall those squeezes, leading to a more cautious positioning as the spot approaches that threshold. The practical takeaway: even if the macro and technical picture suggests an upward movement for USD/JPY, the 160–161 region should be regarded as a soft cap unless the BoJ and Ministry of Finance clearly indicate a higher tolerance or there is a significant shift in the global environment. As the price exceeds 160, the potential for gains diminishes, while the likelihood of a sudden, news-influenced turnaround increases significantly.
The latest CFTC Commitment of Traders report reveals the changes in sentiment regarding USD/JPY through futures positioning. Since June, large speculators have maintained a net-short position on the US Dollar Index; however, this net short has been reduced by approximately three-quarters, now standing at around −38k contracts. In summary, the prevailing “short dollar” consensus is being reversed as market participants acknowledge that the Federal Reserve will maintain a restrictive stance for an extended period beyond their initial expectations. The stabilization observed in the broader dollar context directly contributes to the support for USD/JPY. The narrative surrounding the yen reflects a sense of letdown and diminishing confidence. At the beginning of 2025, significant speculators established substantial net-long positions in JPY futures, anticipating that the Bank of Japan’s tightening measures would ultimately disrupt the prolonged downtrend of the yen. The investment has incurred significant losses. Net-long positioning has decreased since the second quarter, with large speculators having briefly transitioned to a net-short stance once, and they are currently “on the cusp” of doing so again. Asset managers currently maintain approximately 46.5k net-long yen contracts; however, their bullish exposure is beginning to decline, accompanied by decreasing volumes on both the long and short sides. The interplay of diminishing confidence in a robust yen, decreasing short-dollar positions, and lower trading volumes creates a positioning framework that favors a gradual USD/JPY uptrend instead of a sudden turnaround. The immediate concern is less about a “massive yen squeeze” and more about a “orderly drift higher until a new catalyst emerges.”
The USD/JPY chart presents a clear picture. On the daily timeframe, the pair is positioned well above ascending moving averages, indicating a robust uptrend rather than a parabolic blow-off. The 21-day SMA near 156.5 serves as the initial dynamic support and approximately aligns with the breakout area from early January. Below that, the December low near 154.5 and a broader demand zone around the 153.0–153.0 range align with the 100-day SMA (~152.7), establishing a strong medium-term support level unless there is a significant shift in the underlying fundamentals. The upper boundary of the market is established at 157.8–158.2, serving as a short-term cap. Efforts to breach this band in November, December, and now January have faced rejection; however, each setback has been minor, with declines swiftly purchased and the price consistently avoiding a return to the previous range. The observed pattern of shallow pullbacks, higher lows, and repeated tests of resistance typically leads to upward resolution, provided that the macro driver remains consistent. A sustained close above 158.2 would indicate a potential upward movement toward 160.0, which serves as the next significant psychological and historical resistance level. The momentum aligns with that perspective. The MACD histogram has moved back above zero, with the MACD line positioned above its signal line, indicating a strengthening bullish momentum rather than divergence. The RSI at approximately 62 indicates a bullish stance, yet it hasn’t reached overbought levels, suggesting there is still potential for further gains before the risk of exhaustion intensifies.