The foreign exchange market continued its recent strong U.S. dollar trend during Tuesday's Asian trading session. The USD/JPY pair consolidated around 159.70, just a step away from the one-month high touched in the previous session. Over the past four weeks, the currency pair has maintained a sustained uptrend, with bullish sentiment remaining dominant as the dollar finds support from safe-haven flows and interest rate advantages.
Primary Drivers of Recent Dollar Strength
The core factor driving the recent dollar rally stems primarily from uncertainty surrounding the Middle East situation. Despite the U.S. President stating that communication with Iran remains open and anticipating a potential new agreement on extending a ceasefire and resuming navigation in the Strait of Hormuz within the next week, the development of the situation still holds significant variables. Iran has warned that it would suspend relevant negotiations with the U.S. following new military strikes.
Market concerns that escalating conflict could impact global energy transportation security are mounting. As one of the world's most crucial energy transport chokepoints, the Strait of Hormuz handles approximately 20% of global seaborne crude oil shipments. Any news of a deteriorating situation in the region can quickly ignite market risk aversion, boosting demand for traditional safe-haven assets like the U.S. dollar.
Simultaneously, the persistently tense situation in the Middle East is rekindling market worries about global inflation. Rising energy prices not only increase production costs for businesses but could also slow the pace of future inflation decline in major economies. Against this backdrop, markets have begun reassessing the U.S. monetary policy path.
Shifting Market Expectations for Fed Policy
Market pricing indicates that investors currently believe the Federal Reserve may maintain high interest rates for longer than previously anticipated. Some traders have even begun positioning for the possibility of the Fed tightening policy further in 2026. Consequently, U.S. Treasury yields remain elevated, providing ongoing support for the dollar.
Market analysts note that if energy prices remain persistently high, the process of U.S. inflation decline could be disrupted, potentially leading the Fed to extend its restrictive policy stance for an even longer period. However, the USD/JPY rally is not without resistance. As the exchange rate once again approaches the key 160.00 level, market concerns about potential intervention by Japanese authorities have significantly intensified. Looking back over the past two years, Japan's Ministry of Finance has intervened in the market on multiple occasions when the exchange rate neared or breached key psychological levels to stabilize the yen's movement. Therefore, some investors are choosing to remain cautious at current levels.
Potential Support for the Yen
Furthermore, the outlook for Bank of Japan (BoJ) policy provides some support for the yen. The market widely expects the BoJ to discuss the possibility of further interest rate hikes at its mid-June monetary policy meeting. If the BoJ signals more decisive steps toward exiting its ultra-loose monetary policy, the U.S.-Japan interest rate differential could narrow marginally, thereby alleviating some downward pressure on the yen.
From a global capital flow perspective, the market is currently seeking a balance between the dollar's safe-haven attributes and BoJ policy normalization. On one hand, Middle East tensions and global economic uncertainty are driving capital into the dollar. On the other hand, an improving Japanese interest rate environment could help attract some capital back to Japanese markets.
Key Data and Technical Outlook
Market focus this week will center on U.S. labor market data. The Job Openings and Labor Turnover Survey (JOLTS) data will be released first, with Friday's Non-Farm Payrolls report seen as a key event for determining the dollar's short-term direction. If the job market continues to show resilience, it could further solidify market expectations for the Fed maintaining high rates. Conversely, it could trigger some profit-taking among dollar bulls.
From a daily chart perspective, USD/JPY has maintained a rising structure since its rebound from around 154, having successfully broken through the key 158 resistance zone. The MACD indicator remains in a bullish crossover, with the red histogram expanding, indicating sustained medium-to-long-term upward momentum. The RSI is operating near 68, approaching overbought territory but not yet giving a clear reversal signal. Key resistance levels above are located at 160.00, 161.50, and 163.00. Support levels below are seen at 158.50, 157.20, and 155.80. Overall, the daily trend remains biased towards the upside.
On the four-hour chart, USD/JPY has maintained a steady rise along an ascending channel recently, with the short-term moving average system in a bullish alignment. The MACD momentum histogram shows a slight contraction, suggesting some slowing in short-term buying momentum. The RSI is near 65, indicating the market remains in a relatively strong zone. If the price can decisively break above the 160.00 psychological barrier, it could test the 161.50 area. If it falls below the 158.50 support due to intervention fears from Japanese authorities, it could trigger a phase of correction, although the overall uptrend is unlikely to be broken for now.
Current Market Dynamics
The current USD/JPY movement is primarily driven by two main narratives. On one hand, escalating Middle East tensions are boosting global safe-haven demand while reinforcing expectations for a prolonged period of high U.S. interest rates, supporting dollar strength. On the other hand, BoJ policy normalization and the risk of potential FX intervention are capping the pair's upside. In the short term, the 160.00 level will be a critical focal point for the market. If U.S. employment data remains robust and Middle East risks do not ease, USD/JPY may have further room to test higher levels. However, if the BoJ signals a more hawkish stance or official intervention expectations intensify, market volatility could expand significantly.
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