The Japanese Yen weakened against the US Dollar during Thursday’s European session, with USD/JPY holding near a two-week high of 158.00. The pair stayed firm as the US Dollar continued to outperform.
This week, the US Dollar Index (DXY), which measures the Dollar against six major currencies, rose 0.72% to about 98.55. The Dollar remained supported by expectations that the Federal Reserve will not cut interest rates this year.
The CME FedWatch tool indicates the Fed is expected to keep rates unchanged or raise them at least once, with a 66.8% chance of no change. These expectations strengthened after April US CPI data showed headline inflation rose to 3.8% year-on-year, the highest level in almost three years.
Markets also awaited comments from US President Donald Trump after meeting Chinese leader Xi Jinping. In Japan, the Bank of Japan’s April Summary of Opinions suggested a rate rise could come as soon as the next meeting, despite uncertainty linked to the Middle East.
Later on Thursday, attention turns to US Retail Sales for April at 12:30 GMT. The figure is forecast to rise 0.5%, down from the prior 1.7%.
We recall the market mood this time last year, in 2025, when a strong dollar was dominating a weak yen near the 158.00 level. That situation was driven by high inflation and expectations of a Federal Reserve that would not cut rates. As of today, May 14, 2026, the USD/JPY pair remains elevated around 156.50, showing that this core theme has not disappeared.
The inflation picture has evolved slightly since the 3.8% headline CPI figure seen in 2025, with the most recent data for April 2026 showing an annual rate of 3.4%. Despite this small improvement, the CME FedWatch tool indicates the market is still not confident in rate cuts, pricing only a 50/50 chance of a single cut by the end of this year. This continued uncertainty suggests buying call options on the USD to speculate on further strength remains a viable, if expensive, strategy.
On the other side, the Bank of Japan’s hints of a rate hike in 2025 finally materialized when they ended their negative interest rate policy in March 2026. However, the rate differential between the U.S. and Japan is still massive, currently standing at over 5 percentage points. This wide gap continues to make shorting the yen through futures contracts a popular carry trade.
Implied volatility for USD/JPY options remains high, reflecting the market’s nervousness about potential government intervention to support the yen, similar to the interventions we saw in late April and early May of this year. While broad market fear, as measured by the VIX index at a relatively low 13.5, is calm, currency-specific risks are pronounced. Traders could use straddles to bet on a large price swing without picking a specific direction.
In the next few weeks, our focus will be squarely on the upcoming U.S. Personal Consumption Expenditures (PCE) data, the Fed’s preferred inflation metric. A higher-than-expected number would likely reinforce dollar strength, while a soft reading could spark a rapid unwind of long dollar positions. For those already holding bullish USD/JPY positions, now is a good time to purchase put options as a form of portfolio insurance against a sudden reversal.
