USD/JPY traded near 158.90 on Tuesday, extending losses as the US Dollar eased. Risk sentiment improved after Reuters reported the US and Iran may return to Islamabad for talks later this week or early next week, though the White House said no date is set.
US data added pressure on the dollar, with March Producer Price Index growth coming in at 3.8%, below expectations. The data did not remove concerns about ongoing price pressures or expectations of further Federal Reserve tightening.
The Japanese Yen strengthened amid reports that the Bank of Japan is considering raising its price forecasts. The BoJ and the Fed are both due to hold policy meetings in about two weeks.
On the four-hour chart, USD/JPY was around 158.87 and stayed below the 20-period SMA at 159.24 and the 100-period SMA at 159.27. The RSI was near 42, with resistance at 158.94.
Support levels were noted at 158.78, 158.72, and 158.61. A move above 158.94 could reduce near-term selling pressure, with further resistance at 159.24 and 159.27.
We are seeing the USD/JPY pair trend lower, suggesting that strategies like buying put options or establishing short futures positions could be timely. The recent US Producer Price Index, while still high at 3.8%, showed a slower increase than many expected, taking some strength out of the dollar. This presents an opportunity to position for further declines ahead of the central bank meetings.
The potential shift from the Bank of Japan is the most significant factor, as any move to normalize policy would be a major change. We saw how sensitive this pair was to intervention chatter back in 2024 when it approached the 160 level, and the BoJ finally ended its negative interest rate policy that year. With the central bank now considering upwardly revising its price forecasts, the market is pricing in a more hawkish stance than we have seen in years.
On the US side, the narrative is shifting from how many more hikes the Fed will deliver to when the tightening cycle will officially end. While the Federal Reserve is unlikely to signal a pivot to cuts just yet, the theme of policy divergence that drove the pair higher throughout 2023 and 2024 is clearly narrowing. The upcoming Fed meeting will be critical for clues, but the momentum for dollar strength appears to be fading.
With both the Fed and BoJ meetings scheduled within the next two weeks, we expect a sharp increase in implied volatility. This makes options strategies particularly attractive, allowing for defined risk on directional bets or ways to trade the expected price swings. A bear put spread, for instance, could capitalize on a continued slide toward the 158.00 level while capping the upfront cost.
We must watch the key technical levels closely, with the 159.25 area now acting as strong resistance where the 20 and 100-period moving averages converge. A failure to reclaim this zone reinforces the bearish outlook, with initial targets near the support cluster around 158.70. Any short positions should have stop-loss orders placed just above that resistance to manage risk if sentiment suddenly reverses on the US-Iran news.
