Middle East Conflict Fuels Risk
Iran’s foreign minister said on Wednesday that Tehran is reviewing a US proposal to end the war, but does not plan talks aimed at reducing the expanding Middle East conflict. Reports of additional US troop deployments in the region added to fears of escalation, despite US President Donald Trump’s ceasefire comments. Expectations for tighter US monetary policy continued to support the dollar and the pair. Traders have nearly priced out any further Federal Reserve rate cuts and have increased bets on a rate hike by the end of this year. Ongoing geopolitical uncertainty also supported demand for the dollar. However, fears of potential market intervention limited additional yen selling and capped upside moves in USD/JPY. The fundamental picture suggests a continued upward path for the USD/JPY pair. With WTI crude now trading above $110 a barrel, a 35% jump in just one quarter, Japan’s economic outlook is worsening. This was confirmed by the latest trade data showing a ¥2.1 trillion deficit for February 2026, largely due to these high energy import costs.Policy Divergence Supports Dollar
On the other side of the trade, the US Dollar is benefiting from hawkish Federal Reserve expectations. We see the market has almost completely abandoned hopes for rate cuts this year, with the CME FedWatch Tool now showing a 70% chance of a rate hike by December 2026. This wide policy difference between a hawkish Fed and a constrained Bank of Japan provides strong support for the dollar. However, the primary risk holding the pair back is the threat of direct intervention from Japanese authorities. We all remember the Ministry of Finance’s decisive actions in late 2022 when the rate first crossed the 151 level, which caused sharp, sudden drops in the pair. With the pair now hovering near 160.00, verbal warnings could turn into physical intervention at any moment. Given this setup, a straightforward long position carries significant risk of a sudden reversal. A more prudent approach in the coming weeks would be to use options, such as buying USD call options or JPY put options. This strategy allows a trader to profit from further upside while defining and limiting the maximum loss to the premium paid if intervention does occur. Create your live VT Markets account and start trading now.
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