USD/JPY rebounded after a pullback of about 165 pips from near its highest level since July 2024, rising to around 158.75–158.80 in Tuesday’s Asian session. The move followed renewed buying after the prior day’s decline. The Japanese yen weakened after inflation data showed the National Consumer Price Index fell below the Bank of Japan’s 2% target. It was also the lowest reading since March 2022, which reduced expectations of an immediate rate rise as higher energy prices risk weighing on growth.

Middle East Tensions Lift Dollar Support

Middle East tensions continued to support inflation concerns and reduced expectations for further US Federal Reserve rate cuts. US Treasury yields rose, boosting the US dollar and supporting USD/JPY amid worries about escalation involving Iran. On the 4-hour chart, USD/JPY held above the 100-period exponential moving average (EMA), near 158.20. The MACD slipped slightly below its signal line around zero with a flat histogram, suggesting weaker upside pace, while the RSI near 48 stayed close to the midline. Support is seen at 158.20 and then 157.65, with a break below 157.65 pointing towards the mid-157.00s. Resistance is at 159.30, then 159.80 and the 160.00 level. Looking back at late 2025, we saw the USD/JPY pair finding buyers near the 158.00 level, driven by weak Japanese inflation and geopolitical fears supporting the US Dollar. That period’s soft Japanese CPI data pushed back any hope for an immediate Bank of Japan rate hike. This created a clear opportunity for those betting on a stronger dollar.

Policy Outlook Shifts In Early 2026

The situation has since evolved as we stand here in March 2026. Japan’s latest national CPI for February came in at 2.1%, finally edging above the Bank of Japan’s target and fueling speculation that intervention or a policy shift is becoming more likely. We believe the central bank’s patience is now being tested more than at any point last year. Meanwhile, the US Federal Reserve continues to hold its ground, though inflation has cooled to 3.0% as of last month’s reading. US 10-year Treasury yields are hovering around 4.1%, which is still attractive but down from the highs of 2025, suggesting the market is beginning to price in eventual rate cuts later this year. The acute fears surrounding the Iran conflict have also lessened, reducing the dollar’s safe-haven appeal compared to a few months ago. Given the current USD/JPY price of around 162.50, the easy gains from buying the pair may be behind us. We recommend traders use options to define their risk, as the chance of a sudden, sharp reversal has increased. Buying call options with strikes around 164.00 allows for participation in further upside while capping the maximum loss to the premium paid. A more cautious approach would be to implement bull call spreads for the coming weeks. For example, buying a 163.00 strike call and simultaneously selling a 165.00 strike call can significantly reduce the cost of the trade. This strategy profits from a moderate rise in USD/JPY but protects against the increasing risk of yen strength. The primary risk to this outlook is a surprise hawkish pivot from the Bank of Japan, which could send the pair sharply lower toward the 160.00 psychological level. Therefore, any long positions, even through derivatives, should be managed with vigilance. We see the 160.50 area as the new key support level to watch. Create your live VT Markets account and start trading now.

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