The USD/JPY has experienced a notable increase of approximately 12.7% from its 2025 low and is currently positioned just beneath a significant resistance zone after reaching one-year highs in the range of 157.7–157.8. Spot increased to approximately 157.75 due to overall yen weakness, with intraday levels reported between 157.39 and 157.75 as the dollar appreciated for the fourth consecutive session, while the US Dollar Index rose by about 0.15%, achieving a four-week peak. This action builds on a significant rally from the April 2025 low but now encounters the 2025 high-week close at 157.70, with the 2025 swing high at 158.88 and a key resistance zone at 160.74–161.95 above. The price has established a distinct weekly opening range just beneath those upper limits, and the forthcoming directional movement in USD/JPY will depend on the outcome of that range’s breakout as US jobs data and significant US Supreme Court decisions are released. The traditional policy-divergence trade in USD/JPY has largely reached maturity. The markets are currently factoring in the Federal Reserve’s easing cycle, while presuming a gradual and conditional approach to the normalization by the Bank of Japan. Swaps indicate the market is anticipating two complete Federal Reserve rate cuts by approximately October 2026, with the likelihood of the initial cut exceeding 80% by April. Meanwhile, the Bank of Japan’s pricing reflects expectations for a 25 basis point increase to around 0.75%, which is largely anticipated at the December 19 meeting, carrying roughly 94% odds. Additionally, another hike is projected for October 2026, with a greater than 50% chance of it being advanced by June. The current interest-rate differentials are sufficiently broad to sustain the dollar in the short term; however, this support is tenuous. A shift towards a more aggressive easing strategy by the Fed or a more proactive approach from the BoJ could swiftly narrow the US–Japan 10-year spreads, diminishing the carry premium that bolsters long positions in USD/JPY. On the other hand, should the Fed maintain a slower pace and the BoJ hesitates, spreads may begin to widen again. However, this scenario would conflict with rising political and volatility risks, which appear to favor a weaker dollar and a stronger yen in the 6–12 month outlook.
In the short term, the movement of USD/JPY is influenced by US economic indicators and the legal context concerning tariffs. The immediate focus is on the December US employment report: consensus anticipates nonfarm payrolls at approximately 60k, down from 64k previously, with unemployment expected to decrease from 4.6% to roughly 4.5%, and average hourly earnings projected at about 3.6% year-on-year compared to 3.5% prior. Disappointing jobs data could reignite speculation for a potential Fed rate cut in March, which may weaken the dollar and drive USD/JPY down from the 157–158 range. Robust payroll figures and increased wage growth could lead to a contrasting outcome, possibly prompting another examination of the 158.88 peak and delaying the initial rate cut further into the future. A second binary driver is the US Supreme Court ruling on Trump’s reciprocal tariffs and the use of IEEPA: an adverse ruling could compel the government to refund approximately $150 billion in tariff revenue, expand the fiscal deficit, and heighten concerns regarding the longer-term Treasury supply. Typically, this would lead to a steepening of the US curve and, on its own, might bolster USD/JPY. However, if the markets view it as a political shock that jeopardizes fiscal discipline, it could also initiate a risk-off sentiment, increase dollar volatility, and prompt a reevaluation of US assets. The interplay of labor data, Federal Reserve commentary, and tariff disputes places USD/JPY in the 157–158 range at a critical juncture, where event risk could rapidly alter market positioning.
Japanese macro data are presenting mixed signals that have direct implications for USD/JPY. On a favorable note for BoJ hawks, household spending experienced a significant rebound in November, increasing by 6.2% month-on-month following a 3.5% decline in October, and showing a 2.9% rise year-on-year after a previous contraction of 3.0%. The rebound in private consumption, which accounts for approximately 55% of Japan’s GDP, strengthens the argument for demand-driven inflation and a higher neutral rate. This aligns with Governor Ueda’s recent indications that additional rate hikes may be on the table if prices and economic activity meet the Bank of Japan’s projections. However, wage data suggests a different direction. In November, average cash earnings experienced a modest increase of 0.5% year-on-year, marking a significant deceleration from the revised 2.5% growth observed in October. Additionally, overtime pay saw a rise of only 1.2%, compared to the earlier figure of 2.1%. Sluggish wage growth, coupled with a weak yen and high import costs, diminishes purchasing power and increases the likelihood of a decline in consumption, which could further temper core inflation. The market’s response is evident: the implied likelihood of a 25 basis point Bank of Japan increase at the January meeting decreased from approximately 20% to merely 5% following the wage data release. For USD/JPY, the indication is that the short-term policy path remains cautious, which restricts immediate yen strength. However, the medium-term outlook still favors a gradual normalization by the BoJ, contingent on wage recovery as anticipated in December bonuses. The prevailing asymmetry supports a bearish outlook over the next 6 to 12 months, despite short-term data enabling the pair to approach levels sensitive to intervention.
Analysis of the correlation between 10-year yields indicates that USD/JPY is predominantly influenced by US rates rather than Japanese yields. Historically, the pair closely followed the US–Japan 10-year spread until the “Liberation Day” tariff shock, which caused a temporary disruption in the relationship, despite the spreads remaining wide. Recent analysis of the 60-day correlations between USD/JPY and outright US 10-year yields, as well as 10-year differentials, indicates modest relationships. However, a closer look at the shorter 20-day windows reveals that this connection is beginning to strengthen once again. This suggests that the market is returning to a well-known strategy: provided there are no significant political disruptions, fluctuations in US yields and spread expectations influence USD/JPY, whereas risk sentiment and volatility primarily take precedence during exceptional circumstances. Prior to mid-2024, prolonged phases of positive correlation were disrupted primarily by specific risk-off occurrences such as the Q3 growth scare or intervention waves, following which spreads regained their footing. As we approach 2026, the prevailing scenario indicates that the pair will exhibit significant sensitivity to any adjustments in Fed cuts and longer-dated yields, particularly considering the gradual and limited nature of BoJ normalization. If the Supreme Court’s ruling on the Lisa Cook dismissal raises concerns about Fed independence and potential shifts in the Board’s composition, it may lead to a quicker decline in US yields and introduce unpriced downside risks in USD/JPY. Seasonal patterns and the risk of official intervention suggest that the potential for USD/JPY to rise from current levels is constrained. Seasonality indicates that January frequently experiences softness for the pair, whereas the months surrounding the Japanese fiscal year beginning on April 1 and the half-year in October typically present improved probabilities of yen weakness, as capital flows and rebalancing lean towards overseas assets. In contrast, the summer months exhibit a distinct pattern: July has seen five positive and fifteen negative results in the sample, while August has recorded eight positive and twelve negative outcomes. This indicates a propensity for yen strength during periods of reduced liquidity and when global investors are more risk-averse. Additionally, Japanese authorities have consistently established a de-facto intervention line within the 157–160 range; the current trading levels of 157–158 are already positioned within that corridor. Official statements regarding “excessive moves” and “disorderly markets” have often foreshadowed actual FX intervention when USD/JPY was in this range. From a probability perspective, there is an estimated 10% likelihood that USD/JPY concludes 2026 above 161.95, the level indicated by the 2024 high-week close and 2024 swing high, whereas the more likely range scenario maintains the pair beneath that threshold. The interplay of seasonal weakness during certain times of the year, coupled with the constant risk of intervention, suggests that a prolonged move and retention above 160.74–161.95 is improbable unless there is a significant change in Fed policy or an unexpected development in Japan.
From a technical perspective, USD/JPY appears to be extended yet remains within the confines of its overarching uptrend established since the April low. On the weekly chart, the price rebounded effectively from crucial support at 155.03 (the November 2024 high-close) and surged towards resistance at the 2025 high-week close around 157.70. The specified level corresponds with the weekly median-line in a pitchfork established from the April advance, forming a confluence zone where current rallies are experiencing a halt. Immediate resistance is positioned at 157.70, followed by the 2025 swing high at 158.88. Above that, the next critical band is 160.74–161.95, defined by the 2024 high-week close and 2024 swing high, and identified in the 2026 outlook as the key region where a “larger reaction” is likely if reached. On the downside, initial weekly support remains at 155.03; a more significant retracement would aim for 153.65 (a crucial previous pivot) followed by the grouping of the 2022 and 2023 peaks around 151.91–151.94. A structural pivot is identified around 156.65, which corresponds to the 23.6% retracement of the April advance. This level coincides with the convergence of the lower pitchfork parallel in the coming weeks. A weekly close beneath this upward slope would indicate a strong likelihood that a more substantial top has been established, signaling the onset of a larger corrective phase. On daily time frames, USD/JPY is positioned above the 50-day and 200-day EMAs, indicating a formally bullish trend signal. However, the weekly RSI and MACD are beginning to roll over from overbought levels, suggesting a decrease in upside momentum despite the price continuing to test resistance.