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USD/JPY trades below 155 as of writing, extending last week’s drop and marking a shift in short- to medium-term market dynamics. The pair dropped after failing to sustain momentum above levels that had anchored price action for months. The move followed a volatile and bearish January that saw USD/JPY swing between a low of 152.09 and a peak around 159.45.
While price found support near long-term averages, momentum weakened, and traders began reassessing the durability of the yen-funded carry trade. Is the market preparing for a deeper reset?
Hawkish BoJ Signals Reshape Expectations
Yen demand strengthened as investors reacted to signs that the Bank of Japan may continue tightening policy. Preliminary PMI data pointed to improving momentum in manufacturing and services, supporting a firmer economic outlook. GDP upgrades reinforced expectations that inflation and growth may align with the BoJ’s projections.
These developments raised bets on further rate hikes in 2026, narrowing the gap between Japanese and US yields. As rate spreads compressed, the appeal of holding leveraged dollar-long positions weakened. The Bank of Japan's latest policy meeting on January 23, 2026, kept rates unchanged at 0.75%, with a dissenting vote for a hike, as policymakers viewed risks to the economic & price outlook as broadly balanced ahead of February's snap election.
Source: MacroEdge Data Stream via X
Summary of Opinions Takes Center Stage
The BoJ’s Summary of Opinions, scheduled on February 2, has become a focal point for markets as traders looked for clarity on wage growth, tariff risks, and price stability. The Summary of Opinions from the January policy meeting pointed to a clearer sense of urgency around raising interest rates as policymakers track the inflationary impact of a weak yen.
References to “a weak yen” and “foreign exchange” doubled from the prior meeting, signaling that currency depreciation now sits at the center of policy discussions. One board member said the bank should move to a rate hike without missing the right timing, citing rising prices as an urgent priority.
The summary suggested growing support for tightening at a faster pace than the market’s expectation of roughly one hike every six months, reinforcing the view that yen weakness strengthens the case for earlier and more frequent policy action.
Election Uncertainty Adds Political Noise
Japan’s snap election on February 8th adds another layer of uncertainty. Prime Minister Sanae Takaichi seeks a stronger mandate to pursue fiscal spending plans. Earlier concerns over rising debt and issuance contributed to yen weakness during USD/JPY’s surge from October to January.
A decisive election outcome could revive those fears. However, markets also recognize that fiscal expansion may pressure the BoJ to normalize policy faster, which could support the yen. This tension keeps volatility elevated and discourages one-directional trades.
U.S. Data and Fed Signals Guide the Dollar Side
On the US side, economic data and Federal Reserve communication continue to steer dollar demand. The ISM Services PMI and the February jobs report will shape expectations for rate cuts. Forecasts point to moderating service sector growth and slower wage gains.
Such trends could cool inflation pressures and support a dovish shift later in 2026. FedWatch data already show declining odds of an early rate cut, yet markets still expect easing later in the year. This gradual repricing limits upside for the dollar against the yen.
Outlook: Volatility Remains High
USD/JPY now trades in a more fragile environment as policy signals, political risk, and yield dynamics intersect. Levels near 155 have shifted from support to resistance, while areas below 152 and toward 150 draw attention. Yen intervention rhetoric continues to cap sharp upside moves, even as occasional rebounds emerge.
With multiple catalysts ahead, traders brace for continued volatility. Will narrowing rate spreads and BoJ guidance drive the next leg lower, or will dollar resilience delay the adjustment? The coming weeks may decide.
