The USD/JPY opened the week at 157.57, influenced by tensions between the US and Europe. This caused a decrease to 157.44, but the pair recovered to around 158 due to overseas interest and rising yields.
On January 21, the USD/JPY rose to around 158.50 after a sharp increase in yields following Japan’s political developments. It briefly dropped to around 157.50 after calls for calm from US and Japanese officials before stabilising at 158.
The Bank Of Japan’s Decision
The Bank of Japan left rates unchanged while adjusting its inflation outlook, leading to yen selling and pushing USD/JPY above 159. After Governor Ueda’s press conference, the pair fell sharply to 157.50 and then rebounded to just below 158.50.
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We saw extreme volatility last week with the USD/JPY swinging between 157 and 159. This choppy price action shows deep uncertainty in the market. Now, all attention is shifting to the upcoming Federal Reserve meeting, which will set the tone for the next few weeks.
Future Strategies Following The Fed Meeting
This kind of environment suggests that simply buying or selling futures is risky. Instead, we should look at options strategies that profit from large price swings, regardless of direction. Buying straddles or strangles could be a smart move to capitalize on the high volatility we expect after the Fed announcement.
The Cboe’s yen volatility index (JYVIX) surged to a 12-month high of 13.5 last week, confirming the market’s nervousness. Currently, the CME FedWatch tool indicates a 90% probability that the Fed will keep rates unchanged. The real risk, and opportunity, will come from the Fed’s forward guidance on future policy.
The Bank of Japan’s hawkish inflation revision was not a surprise, given that Japan’s national core CPI for December 2025 was 2.8%, staying above the 2% target for over a year and a half. This policy divergence with the Fed puts us in a situation similar to what we saw in 2023 and 2024. Back then, verbal warnings were often followed by direct market intervention when the yen weakened too quickly.
We should pay close attention to any move back toward the 159 level that was breached last week. If a dovish Fed statement sends the dollar surging, we can expect more urgent calls for calm from Japanese officials. These verbal interventions created the sharp reversals we saw last week and represent key exit or entry points for short-term derivative plays.
