• Hawkish Fed supports USD/JPY: The Fed’s rate hike and signal of further tightening reinforce the US dollar’s yield advantage over the yen.
• BoJ guidance is the key catalyst: A hike to 1.25% is largely priced in; Ueda must signal further tightening to sustain yen strength.
• Japan CPI composition matters: Stronger services and underlying inflation could support further BoJ hikes, while softer data may weaken the yen.
• 156.13/50 is key resistance: A break below 155.45 reinforces bearish reversal that may expose 154.47, 153.70 and 152.65/55; above 156.50 shifts focus to 157.20.

USD/JPY climbed towards an intraday high of 156.41 on Wednesday, 16 September 2026, during the US session, following the Federal Reserve’s 25-basis-point rate hike to 3.75%–4.00%, its first increase since 2023.

More importantly, the latest FOMC projections showed that 12 of 18 policymakers expect another rate hike before the end of 2026, while policy rates are projected to remain unchanged through 2027. The Fed also raised its 2026 core PCE inflation forecast to 3.4% and its estimate of the longer-run Fed funds policy rate to 3.2%.

Fed Chair Kevin Warsh reinforced the hawkish repricing by warning that inflation remains too high and that underlying price pressures have not improved meaningfully. The Fed funds futures market now assigns around a 90% probability of another Fed hike by year-end, lifting the US Dollar Index to a seven-week high.

This matters for USD/JPY because the US–Japan yield differential remains in a positive territory. Even if the Bank of Japan (BoJ) raises rates tomorrow, the yen may struggle to attract sustained demand unless markets also bring forward expectations for subsequent Japanese rate increases.

Japan will release its latest inflation trend data for August before the BoJ’s monetary policy decision on Friday, 18 September 2026.

Japan’s core-core CPI, which excludes fresh food and energy, is expected to remain unchanged at 1.9% year-on-year in August.

For the BoJ, the more important question is whether inflation is becoming domestically sustainable rather than merely reflecting oil prices and currency weakness. Traders should focus on:

• Services inflation and whether higher wages are feeding through to consumer prices.
• Measures excluding both fresh food and energy.
• Evidence that price increases are broadening beyond imported goods.
• Whether inflation expectations remain anchored around or above the BoJ’s 2% target.

An upside CPI surprise accompanied by stronger services inflation would reinforce expectations of further BoJ tightening and may pull USD/JPY lower. On the other hand, a softer reading, driven by weak domestic demand, would give BoJ Governor Ueda more room to maintain a cautious policy stance.

The BoJ is widely expected to raise its policy rate by 25 basis points to 1.25%, which would be its highest level in 31 years. The move would follow June’s increase to 1.00% and continue the central bank’s gradual withdrawal from accommodative monetary policy.

Since the increase is already nearly fully priced in, the immediate yen reaction may prove short-lived. Governor Ueda’s press conference should be the more significant catalyst.

A hawkish message would include:

• A clear signal that further rate increases are likely if the economic outlook remains intact.
• Greater concern over second-round inflation effects from energy prices and yen weakness.
• An indication that the policy rate remains below neutral and must move higher.
• Openness to another hike before the end of 2026, which implies an increased possibility of a back-to-back rate hikes, echoing similar remarks made by BoJ official Takata at the start of this month.
• Confidence that wage growth can sustain underlying inflation near 2%.

Conversely, repeated emphasis on downside growth risks, weak consumption or the need to assess the impact of previous hikes would be interpreted as dovish. That outcome could allow USD/JPY to extend its post-FOMC rebound even if the BoJ delivers the expected increase.

So far, Japan’s short-term interest rate market has begun to price in a more hawkish BoJ, with a faster pace of monetary policy tightening, suggesting at least one additional increase by the end of 2026, and about 2.7 hikes in total, including Friday’s 18 September move, by March 2027.

The positive gap of the US-Japan implied policy rate curve spread that derives from the difference of short-term interest rate futures of the US and Japan, respectively, has started to narrow; the gap for October 2026 has decreased to 2.76% from 2.90% in September 2026 and a steady narrowing to 2.69% in December 2026, plus a shift down from 2.81% printed three months ago in the same period (see Fig. 1).

In a nutshell, BoJ better not disappoint such hawkish repricing of Japan’s interest rate trajectory.

Let’s now focus on the short-term (1 to 3 days) technical analysis of USD/JPY

The 2.3% rally seen over the past one week from the 8 September 2026 intraday low of 152.89 has hit an inflexion zone of 155.03/156.73, which is the pullback resistance of the former neckline support of the key “Head & Shoulders” reversal configuration (see Fig. 2).

In addition, the hourly RSI momentum indicator has flashed a bearish divergence after hitting the overbought zone on Wednesday, 16 September 2026, increasing the likelihood of a bearish reversal for USD/JPY at this juncture.

Watch the 156.13/50 key short-term pivotal resistance on the USD/JPY, and a break below the 155.45 near-term support (downside trigger) may set off a minor bearish reversal sequence to expose the next intermediate supports at 154.47, 153.70 and 152.65/55 (see Fig. 3).

However, a clearance with an hourly close above 156.50 invalidates the bearish scenario for a squeeze up to test the 157.20 medium-term pivotal resistance (also the 20-day moving average).

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• Headline inflation increased from 2.6% to 2.9% year-on-year.
• Core inflation remained at 2.6%, above the 2.5% forecast.
• Services inflation held at 3.4%, instead of rising to 3.5%.
• Wage growth slowed, while unemployment benefit claims increased by 27,800.
• The Bank of England is expected to leave interest rates unchanged tomorrow.
• Energy pushes headline inflation higher

UK consumer price inflation accelerated from 2.6% to 2.9% year-on-year in August, in line with market expectations. Core inflation delivered a slightly stronger reading, remaining at 2.6% against expectations for a decline to 2.5%. The figures confirm that price pressures in the British economy remain relatively persistent.

The increase in headline inflation was driven mainly by energy prices, including more expensive fuel. This is particularly important given the continued rise in global oil prices. Following the Houthis’ advance in Yemen, crude oil is moving towards USD 110 per barrel, increasing the risk that UK inflation will remain above the Bank of England’s target for longer.

For the Bank of England, indicators of domestic price pressure are more important than the headline CPI figure alone. Core inflation remained at 2.6%, while services inflation was unchanged at 3.4%. The latter was slightly better than some forecasts, which had pointed to an increase to 3.5%.

Airfares also had a smaller impact than expected. Prices increased by 6.2% compared with July, but this was not enough to push services inflation higher.

The data therefore suggest that rising energy costs have not yet generated significant second-round effects. In other words, higher fuel and energy prices are not visibly spreading into wages and other service-sector categories.

The latest labour market figures provide a similarly mixed picture. Average weekly earnings increased by 3.9% year-on-year in July, in line with forecasts but below the previous month’s growth rate of 4.2%. Regular pay growth, excluding bonuses, remained at 3.5%.

The unemployment rate was unchanged at 4.9%, slightly better than the 5.0% expected by economists. However, the number of people claiming unemployment-related benefits increased by 27,800 in August, considerably more than the forecast rise of 8,300. Claims had declined by 11,800 in the previous month.

The UK economy is therefore sending conflicting signals. Better than expected July growth data indicate that economic activity remains resilient, but weaker wage growth and the sharp increase in benefit claims point to a fragile labour market.

The Bank of England must balance the risk of persistent inflation against the possibility of further weakness in employment and economic growth. More expensive energy supports maintaining a restrictive policy stance, but stable services inflation and slowing wage growth reduce the need for an immediate rate increase.

Today’s inflation report is unlikely to materially change expectations ahead of tomorrow’s decision. The Bank of England is widely expected to keep interest rates unchanged. The market will focus primarily on the voting split and the guidance concerning future meetings.

At the end of June, markets were pricing in slightly more than one rate hike by the middle of next year. They now expect around four increases. This substantial shift reflects higher energy prices and the more hawkish stance adopted by major central banks. The European Central Bank has delivered a more restrictive message, the Reserve Bank of Australia is moving towards another increase, and the Federal Reserve and the Bank of Japan may also tighten policy.

Four Bank of England rate hikes still appear to be an aggressive scenario. Today’s inflation figures do not provide a clear justification for starting a rapid tightening cycle. Headline inflation has moved closer to 3%, but services inflation has not accelerated and wage pressures are gradually easing.

The forthcoming debate over the UK budget creates an additional source of uncertainty. Any renewed fiscal tightening could weaken economic activity and reduce the Bank of England’s room to raise interest rates.

GBP/USD initially rose to around 1.3495 following the CPI release before retreating towards 1.3480. The limited reaction suggests that the data have not fundamentally altered the outlook for UK monetary policy. If the Bank of England fails to validate the market’s hawkish expectations, investors may reduce their bets on future rate hikes, creating downside risk for sterling.

Since July 2025, GBP/USD has been trading within a broad consolidation range between 1.37–1.38 and 1.30–1.3160. The US dollar has been strengthening again since 26 August this year, although the scale of the decline in the currency pair remains limited for now. The long-term trend remains upward, with no clear signs of a reversal at this stage.

Opinions are the authors'; not necessarily that of OANDA Business Information & Services, Inc. or any of its affiliates, subsidiaries, officers or directors. The provided publication is for informational and educational purposes only.
If you would like to reproduce or redistribute any of the content found on MarketPulse, an award winning forex, commodities and global indices analysis and news site service produced by OANDA Business Information & Services, Inc., please refer to the MarketPulse Terms of Use.
Visit https://www.marketpulse.com/ to find out more about the beat of the global markets.
© 2026 OANDA Business Information & Services Inc.