USD/JPY rose for a seventh day on Tuesday, supported by broad US Dollar strength and higher oil prices linked to the US-Iran war. It traded near 159.18, recovering most of the losses seen after a suspected intervention move in late April.
Price swings increased as the 160.00 level came back into focus. After comments from US Treasury Secretary Scott Bessent about avoiding excessive foreign exchange volatility, USD/JPY slipped to around 158.65 before rebounding.
Market Drivers And Key Levels
The US Dollar stayed supported as markets remained cautious about the Middle East conflict. Indirect talks between the United States and Iran remain stalled due to disagreements over Iran’s nuclear programme.
US President Donald Trump said on Monday he halted an immediate planned attack on Iran after requests from Gulf leaders to allow peace talks. He also said the US military is ready for a “full, large-scale assault” if no acceptable agreement is reached.
Higher oil prices have reinforced expectations for a more hawkish Federal Reserve, with traders pricing a higher chance of a rate rise by year-end. Higher oil is also a headwind for the Yen because Japan relies heavily on imported energy, especially from the Middle East.
Stronger-than-expected Japanese GDP data on Tuesday did not lift the Yen. The data still added to expectations that the Bank of Japan may keep tightening policy gradually.
Options Strategies And Intervention Risk
The clear trend for USD/JPY is upward, driven by a strong US dollar and geopolitical tensions pushing oil prices higher. With the pair moving towards the 160 level again, buying call options could be a way to trade this momentum. This allows us to capture potential gains if the dollar continues to strengthen against the yen in the coming weeks.
However, we must be extremely cautious around the 160.00 mark, as it is a known trigger point for intervention. Looking back to the spring of 2024, we saw Japanese authorities aggressively defend the yen, pushing the pair down by over 5 yen in a single day from that exact level. Therefore, holding outright long positions is risky, as a sudden defensive move from the Bank of Japan could erase profits instantly.
A more prudent approach would be using call spreads, such as buying a 160 call while selling a 162 call. This strategy caps our potential profit but significantly lowers the initial cost and protects us from losing everything on a sudden yen rally. It’s a calculated way to stay bullish while respecting the very real threat of official intervention that we saw just last year.
The pressure from high oil prices on the yen should not be underestimated, especially with the ongoing US-Iran conflict threatening supply. Japan imports nearly all of its crude oil, with recent data showing over 95% of its supply comes from the Middle East. This fundamental weakness means a sustained period of expensive energy will continue to weigh heavily on the yen.
The interest rate difference between the US and Japan remains a powerful driver for this currency pair. Even though the Bank of Japan ended its negative interest rate policy back in March 2024, the Federal Reserve’s hawkish stance keeps US yields far more attractive. This massive gap in rates provides a constant incentive for traders to borrow yen and invest in higher-yielding US dollars.
Given the heightened volatility from political comments and intervention threats, trading options that profit from sharp price movements could be effective. Buying straddles or strangles allows us to profit from a large price swing in either direction. This is a sensible strategy when we know a major event, like an intervention or a geopolitical escalation, could happen at any moment.
