USD/JPY extended its gains Wednesday, reaching a one-week high as improving risk sentiment and firm U.S. Treasury yields supported the dollar. The pair traded near the top of its 155.36-156.71 range, with sliding volatility driving demand for yen crosses. USD/JPY’s 1-year implied volatility fell to 9.5%, its lowest level since September, as investors adjusted hedges and reduced risk premiums ahead of Friday’s Bank of Japan policy decision. Markets widely anticipate a 25-basis-point rate hike, but the BOJ’s cautious outlook may keep real rates negative, capping yen strength.

The technical outlook for USD/JPY is bullish but constrained by key levels. Resistance is at the 21-day moving average at 157.12, with stronger barriers near 158, a level that has capped gains in recent weeks. Support is at 155.35, with additional levels near the 154.80-155.00 zone. A break below the December 19 low of 154.45 would likely trigger further downside, as profit-taking and position unwinding intensify. Conversely, a sustained break above 157.12 would signal bullish momentum, targeting the 158 congestion zone.

Upcoming BOJ policy signals and trade data will be critical for USD/JPY’s direction. While a rate hike on Friday is expected, the central bank’s cautious tone and focus on inflation sustainability may limit yen gains. Japan’s December trade data and MOF flows will also provide clues about the yen’s trajectory. Until a clear breakout above 157.12 or below 154.45 occurs, USD/JPY is likely to remain range-bound, with risk sentiment and central bank developments shaping its next move.