USD/JPY is trading close to its yearly high of 158.20, amid tensions surrounding Fed Chair Powell. Powell is facing allegations related to funding for renovations at the Fed’s headquarters, which he has denied, indicating possible hidden motives behind the accusations. Japan’s Prime Minister Takaichi may call for an early election, which could impact the Yen’s value. As both the US Dollar and the Japanese Yen struggle, USD/JPY remains strong during the European session.

US Dollar Index Performance

The US Dollar Index has dropped 0.4%, hovering around 98.70 after reaching near 99.25 earlier. This decline stems from discussions about the Fed’s independence and the upcoming US Consumer Price Index data. The US Dollar is the main currency used worldwide, essential for international trade. The value of the US Dollar is greatly influenced by the Federal Reserve’s monetary policy, especially regarding interest rates. When the Fed uses quantitative easing, it enhances credit flow to support the economy when lowering interest rates isn’t enough. Conversely, quantitative tightening reverses these actions and usually strengthens the Dollar. FXStreet offers quick insights into market movements. The current scenario is marked by significant tension, with USD/JPY nearing yearly highs around 158.20, even with weaknesses in both currencies. The dollar is being pressured by serious allegations against the Fed Chair, which raises questions about the central bank’s independence. Meanwhile, the yen is losing strength due to speculation that Japan’s Prime Minister may call an election as early as February. For traders in derivatives, this situation indicates a potential rise in volatility in the coming weeks. Implied volatility in USD/JPY options has climbed to a three-month high of 11.2%, and we expect this trend to continue. Strategies like long straddles or strangles could be profitable, as they can benefit from significant price moves in either direction, regardless of the reasons.

Upcoming US Consumer Price Index Data

All attention is on tomorrow’s US Consumer Price Index data for December 2025, which could be a crucial moment for the dollar. Analysts predict a year-over-year core inflation rate of 3.7%, but we see a risk of it reaching 3.8%. If the number is stronger than expected, markets could shift their focus back to the Fed’s battle with inflation, potentially pushing USD/JPY higher. From 2017 to 2021, we observed that markets often overlook political pressures on the Fed, returning their attention to solid economic data. While the criminal charges against Powell are serious, the market’s direction will likely be steered by inflation. This history suggests that the CPI’s impact could outweigh the political issues surrounding the Fed. On the Japanese side, political uncertainty plays a major role in keeping the yen weak against other currencies. In the past, periods leading up to snap elections in Japan have led to underperformance of the yen, as global investors tend to hold back until there’s clarity on future economic policy. The possibility of a new administration adds further unpredictability to the currency. This environment suggests that traders may want to prepare for a breakout using options ahead of the CPI release and the possible February election announcement. A sustained move above the 158.20 mark could be targeted with call spreads to manage costs, while a surprising decline from a weak CPI print would make put options appealing. In light of these dual uncertainties, hedging current spot positions should be a priority. Create your live VT Markets account and start trading now.

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