USD/JPY was little changed on Tuesday after the US Presidents’ Day weekend. It hovered near 153.40 after dipping to about 152.70. Trading was mixed as the US Dollar struggled to extend its rebound.
The Yen stayed supported as investors continued to expect a Bank of Japan rate hike in the coming months. Markets also kept a close eye on Prime Minister Sanae Takaichi’s pro-stimulus policy plans.
Dollar And Yen Drivers
US data gave the Dollar some support. The NY Empire State Manufacturing Index rose to 7.1 in February versus 6 expected, down from 7.7. The ADP Employment Change four-week average increased to 10.3K from a revised 7.8K (previously 6.5K).
The US Dollar Index traded near 97.24 after hitting an intraday high of 97.54. Recent data showed Nonfarm Payrolls rose 130K in January versus December’s revised 48K, while unemployment ticked down to 4.3% from 4.4%.
US CPI rose 0.2% month-on-month, down from 0.3%. It eased to 2.4% year-on-year from 2.7%. Fed Governor Michael Barr said he wants more evidence that inflation is moving to 2%, and noted the jobs market is stabilising.
Markets are pricing in two cuts this year, with rising odds of a third. The December dot plot showed one cut in 2026. CME FedWatch suggests the first cut could come as early as June.
In Japan, the key release is Friday’s National CPI. In the US, traders will watch the Fed minutes on Wednesday, then core PCE and Q4 GDP on Friday.
What Changed Since Last Year
A year ago, USD/JPY was near 153.40. Sentiment leaned toward a stronger yen because traders expected Bank of Japan (BoJ) rate hikes. In early 2025, the market was also pricing in at least two Federal Reserve rate cuts. The main view was that the policy gap between the US and Japan would narrow.
Instead, events played out very differently. The pair is now trading around 168.50. The Federal Reserve delivered only one rate cut in late 2025 because inflation stayed sticky. The latest January 2026 CPI report showed core inflation still high at 2.8% year-over-year. Meanwhile, the BoJ’s exit from negative rates was a one-off move to 0.10% and did not give the yen lasting support.
This policy divergence has pushed yen implied volatility to its highest level since 2023. That creates an opportunity for options traders. One approach is to buy volatility using structures like long straddles, which can profit from a large move in either direction. These strategies can work well when central bank policy remains uncertain.
The interest rate gap is also much wider than expected last year. The US Fed Funds Rate is 5.00%–5.25% versus Japan’s 0.10%. That makes carry trades attractive, benefiting traders who are long USD and short JPY. Derivatives traders can use forward contracts or currency futures to capture this yield difference over the coming weeks.
Now, focus turns to upcoming US core Personal Consumption Expenditures (PCE) data for clues on inflation. A stronger-than-expected result could push USD/JPY higher by delaying expectations for the next Fed cut. A weaker reading could trigger a sharp, although possibly temporary, pullback.
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