USD/JPY is positioned at 159.18, marking a third consecutive session of gains and revisiting levels that prompted official “rate check” alerts from Japanese authorities on January 23. The pair has advanced over 4.3% from its February low in a rally currently approaching a significant resistance cluster on the weekly chart — the 159.22 January high and the 159.45 mid-January peak. This zone has previously seen USD/JPY being pushed back twice, and a weekly close above 159.60 would indicate a potential structural regime shift towards 160 and higher. The DXY is currently approaching significant resistance at 99.50 and 100.40, levels that link price movements from January 2023 to March 2026. These points serve as a critical evaluation of whether the dollar’s overarching uptrend from the lows of 2008 will persist with strength or enter a phase of consolidation. The overarching framework influencing this shift is quite apparent. Brent crude experienced a notable increase of around 8%, reaching $98.49 per barrel, following Iranian drone strikes that impacted vessels near Iraq’s export terminals and in the Strait of Hormuz on Wednesday night. This development has propelled energy prices closer to the $100 threshold, a figure that has captured the attention of risk desks since the onset of the Iran conflict on February 28. Japan relies heavily on imports for its energy needs, predominantly sourcing from the Middle East. The country lacks a substantial domestic hydrocarbon production capacity, does not have significant LNG output, and possesses no strategic reserves adequate to withstand an extended closure of the Strait of Hormuz. Each dollar increase in crude oil prices imposes a direct burden on Japan’s trade balance, contributing to a structural decline in the current account that was already facing challenges due to the interest rate disparity between the Bank of Japan and the Federal Reserve. Rising oil prices concurrently undermine the fundamental rationale for yen strength and compel the Bank of Japan into a challenging monetary policy scenario, where inflation may necessitate tightening while the energy-induced trade shock calls for stimulus. USD/JPY at 159.18 reflects the market’s exact and unforgiving interpretation of that contradiction.
The reliance of Japan on energy supplies from the Middle East stands as the most significant structural factor influencing USD/JPY in the present context, warranting a detailed understanding rather than a cursory glance. Japan obtains a significant portion of its crude oil imports from Middle Eastern producers that transport their exports via the Strait of Hormuz. On Wednesday, Iranian forces targeted vessels close to Iraq’s crucial export terminals — the Basra terminals responsible for the bulk of Iraq’s 1.4 million barrels per day export capacity — while also launching an attack on Oman’s largest oil storage facility. This dual action has led to a distinct and tangible decline in Japan’s terms of trade, with no immediate remedy in sight. MUFG analysts have clearly defined the existing energy price landscape as a detrimental terms-of-trade shock for Japan. This situation is not merely a fleeting spike to be overlooked; rather, it represents a prolonged decline in the price Japan pays for its energy in comparison to the prices it garners for its exports. The terms-of-trade shock exerts a direct mechanical influence on USD/JPY via the current account. Japan settles its energy imports using US dollars. As energy prices surge by 8% to 10% in a single trading session, and with the Strait of Hormuz effectively closed due to Iranian forces ensuring its continued blockade, Japanese importers find themselves requiring an increased amount of dollars to maintain their current energy purchase volumes. The heightened demand for dollars from Japanese energy importers exerts direct upward pressure on USD/JPY, irrespective of the interest rate differential, the Bank of Japan’s policy stance, or any other macroeconomic variables. MUFG provided an important insight that alters the intervention considerations considerably: Japan’s authorities might accept a weaker yen in the short term specifically because the energy crisis indicates that a stronger yen would offer only minimal relief on import prices — the fundamental disruption in commodities is not an issue that yen appreciation can address. This situation is fundamentally distinct from the intervention dynamics observed in 2022, when Tokyo took assertive measures to limit USD/JPY due to the yen’s depreciation exacerbating import inflation, which posed a direct threat to household purchasing power. In the existing framework, with Iran managing the physical supply disruption, currency intervention serves to buy time rather than tackle the underlying issue.
Prior to the onset of the Iran conflict on February 28, market expectations indicated more than 50 basis points of Federal Reserve rate reductions anticipated by the end of 2026. As of March 12, that figure has been reduced to below 25 basis points — a decrease of over 50% in merely 13 trading days. The current pricing of Fed Fund Futures indicates a 58% likelihood that the next rate cut will occur in July, a shift from previous anticipations for a May or June timeline. Market discussions have shifted from speculating on a potential Fed easing in 2026 to questioning if any easing will occur at all. Additionally, some market participants are starting to consider the likelihood of the ECB implementing a rate hike as soon as June, while the Fed remains stagnant in the 3.50% to 3.75% range. The anticipated divergence in monetary policy — with the BoJ likely to raise rates in April while the Fed maintains a pause until mid-year — suggests a potentially positive outlook for the Yen when considered in isolation. However, the energy shock is surpassing the theoretical model. US 10-year Treasury yields rose to around 4.25% as inflation concerns driven by oil intensified during the Wednesday session, providing a yield premium that positions dollar-denominated assets as the preferred choice for capital allocation amid a decline in risk appetite. The February CPI data released Wednesday by the Bureau of Labor Statistics indicated that headline inflation increased by 0.3% month-over-month, compared to a prior increase of 0.2%.
Meanwhile, core CPI, which excludes food and energy, rose by 0.2% month-over-month following a prior reading of 0.3%. Both figures aligned with market expectations. The market largely overlooked the CPI print not due to its benign nature, but rather because it reflects historical data from a pre-war context. Goldman Sachs anticipates that PCE inflation will reach 2.9% with oil at $98 and 3.3% if crude remains above $110. The crucial inflation data to focus on is not the figure from February; rather, it is the readings from March and April that will fully reflect the impact of $100 crude on consumer price indexes throughout the G10. Upon the arrival of that data, the Federal Reserve’s already limited easing cycle encounters further restrictions, Treasury yields experience increased upward pressure, and the interest rate differential advantage of USD/JPY expands rather than contracts. The upcoming release of the PCE Price Index on Friday, in conjunction with the preliminary Q4 GDP annualized reading, Durable Goods Orders, and the University of Michigan Consumer Sentiment and Expectations Index, signifies the next significant event risk for the pair. With crude priced between $96 and $101, and the market highly responsive to any indications of future inflation, a PCE reading that exceeds expectations—even slightly—could propel USD/JPY beyond the 159.60 threshold, which serves as the weekly catalyst for Fibonacci extension targets at 160.80 and 162.00.