USD/JPY is meeting strong resistance just under 160, with the proximity to that level also raising the risk of official intervention. The pair’s near-term direction is being shaped by geopolitics and the energy trade, as a reopening of the Strait of Hormuz would be expected to restart energy imports and increase real-demand selling of the yen.
On the policy side, rising import prices are framed as an input into faster domestic inflation, which in turn could steer the Bank of Japan towards a rate increase at its June meeting. In the US, the Federal Open Market Committee is viewed as staying on hold, a backdrop that may cap further dollar weakness, depending on how Middle East developments and inflation trends evolve.
Intervention Risk and Persistent Yen Weakness
We see the USD/JPY pair is caught in a battle just below the 160 level. The risk of Japanese authorities intervening to support their currency is a major hurdle, much like the 9.79 trillion yen they spent during the interventions of April and May 2024. However, the fundamental pressure for a weaker yen remains incredibly strong.
This tension creates a prime environment for trading volatility, especially with the Bank of Japan’s policy meeting just weeks away. With Japan’s core inflation holding stubbornly above the 2% target for over two years now, we believe options strategies like straddles could be effective. These positions would profit from a large price swing if the BoJ either hikes rates or disappoints the market by holding steady.
Geopolitical Shocks, Import Demand, and Interest Rate Differentials
We are also watching for any de-escalation of tensions in the Middle East. Should the Strait of Hormuz see a full reopening, we would expect a wave of yen selling from Japanese importers rushing to buy dollars for resumed energy shipments. As Japan imports over 90% of its crude oil, this real-world demand would put immediate and significant upward pressure on USD/JPY.
On the other side, do not expect much help from a weaker U.S. dollar. The Federal Reserve looks set to keep its rates on hold, maintaining a massive interest rate gap of over 5 percentage points between the U.S. and Japan. This differential makes it fundamentally attractive to hold dollars over yen, placing a firm floor under the currency pair.
