Yen Strengthens: Are the Fed and BoJ Preparing a Surprise?

The Japanese yen strengthened against the US dollar (USD) during trading on Monday (October 26, 2026), ahead of monetary policy meetings by two of the world’s major central banks. The USD/JPY pair struggled to sustain gains early in the Asian session, facing renewed selling pressure below the 157.00 level. The Japanese currency remains near its strongest position in a month, while a weakening US dollar and shifting interest rate expectations have heightened investor focus on the upcoming decisions from the Federal Reserve (the Fed) and the Bank of Japan (BoJ) this week.

The yen’s strength is supported by growing expectations of an interest rate hike by the BoJ. BoJ Governor Kazuo Ueda recently offered a somewhat hawkish assessment, noting that Japan’s underlying inflationary pressure is moving closer to the 2% target. This reinforces the view that the Japanese central bank has grounds to continue tightening its monetary policy. Should expectations for a rate hike intensify, the yield differential between Japanese and US assets could narrow, providing further support for the yen.

Meanwhile, the US dollar remains under pressure following a decline in US government bond yields from multi-year highs. Several Fed officials have also signaled that there is no urgent need to raise interest rates at the October 27–28 meeting. Nevertheless, the market still assigns an approximately 80% probability to a rate hike in December, suggesting that any potential weakness in the dollar may remain limited. Investors will be closely monitoring the FOMC’s decision and statements from Fed Chair Kevin Warsh for clues regarding the future direction of monetary policy.

Beyond central bank policies, geopolitical tensions in the Middle East continue to influence market sentiment. US President Donald Trump has stated that he will not take immediate military action against Iran, yet regional tensions have yet to subside. The Houthi group in Yemen has once again threatened attacks on King Khalid International Airport in Riyadh, while US-Iran talks continue to face obstacles. This situation sustains demand for safe-haven assets, including the US dollar and the Japanese yen, suggesting that the USD/JPY pair may remain volatile.

Looking ahead, market attention is focused on the Federal Reserve’s decision on Wednesday, the US third-quarter economic growth report and the Personal Consumption Expenditures (PCE) price index on Thursday, as well as the Bank of Japan’s (BoJ) policy decision on Friday. These data points and policy outcomes will shape interest rate expectations for both nations. Should the Federal Reserve signal a more dovish stance while the BoJ leans further toward a hawkish position, the yen could continue to strengthen, potentially pushing the USD/JPY pair below 156.00. Conversely, a more hawkish stance from the Federal Reserve could help the US dollar regain strength.