Is it possible to read extended ASCII from the serial port?
Yes, of course, you can read any byte sequence. As you have experienced,
if you send the byte values 194 and 165, your Arduino reliably reads 194
and 165.
Now, you have to be aware that there are tons of incompatible character
encodings that could all be called “extended ASCII”. I do not know which
one you have in mind. Maybe there is such an encoding where “¥” has the
code point 157. Nowadays, however, almost any modern computer system
uses Unicode, and serializes the characters using UTF-8. The character
“¥” is serialized in UTF-8 as the pair of bytes 194 and 165.
If you want to use the Grbl protocol, send interrupts as bytes, do not
think about them as “characters”.