Bias: USD/JPY is bullish-to-range-bound, trading above the 90-day average and in the upper half of the 3-month range.
Key drivers:
- Rate gap: The Fed is expected to ease later in 2026, while the BoJ has tightened recently and signals more hikes if inflation sticks, narrowing the policy gap that supports USD/JPY.
- Risk/commodities: Oil stays above its longer-term average with volatility, adding pressure on the yen as Japan absorbs higher energy costs.
- Macro: Tokyo inflation cooled to around 2% in December, shaping BoJ policy expectations.
Range: USD/JPY likely to drift near the upper end of the 3-month range, with occasional pullbacks but no decisive breakout.
What could change it:
- Upside risk: A stronger US payrolls print or hawkish Fed commentary could lift the dollar versus the yen.
- Downside risk: A clearer BoJ tightening path or a sharp drop in oil prices could push USD/JPY toward the middle or lower end.
