During Monday's Asian trading session, USD/JPY extended its gains for the sixth consecutive day, rising to around 158.90 and reaching a new cyclical high. Market expectations for the Federal Reserve to maintain high interest rates continue to strengthen, coupled with rising global risk aversion, which has driven sustained capital inflows into the dollar.
Recently, several Federal Reserve officials have consistently delivered hawkish signals, emphasizing that curbing inflation remains the core policy objective and suggesting that further interest rate hikes are possible if price pressures persist. This stance has significantly shifted market expectations away from earlier optimism about rate cuts. According to data from the CME FedWatch Tool, the market now prices in approximately a 48% probability of a Fed rate hike in December, up from about 14% just a week ago. Bets on prolonged high U.S. interest rates have become a key driver behind the sustained strength of the U.S. dollar index.
The rapid escalation in market expectations for Fed rate hikes has kept the dollar index trading near its highest levels since April. Concurrently, ongoing tensions in the Middle East have further enhanced the dollar's safe-haven appeal. Currently, the United States and Iran have yet to reach an agreement on a ceasefire and the reopening of the Strait of Hormuz, fueling persistent concerns in global markets about energy supply risks. U.S. President Trump has publicly warned Iran to expedite negotiations or face potential new consequences. Market fears that the Middle East situation could escalate further are increasing risks related to transportation through the Strait of Hormuz, which handles approximately 20% of global seaborne crude oil shipments. Current restrictions on this vital passage have driven international crude oil prices higher, intensifying global inflation concerns.
For Japan, the impact of rising energy prices is particularly pronounced. Given Japan's heavy reliance on energy imports, higher international oil prices directly increase import costs and exert ongoing pressure on domestic inflation. Domestically, Japan's recently released producer inflation data exceeded market expectations, leading markets to speculate that the Bank of Japan may gradually adjust its long-standing ultra-loose monetary policy.
Bank of Japan Policy Board member Kazuo Ueda stated that interest rate hikes should be advanced promptly to address long-term inflation risks stemming from geopolitical conflicts. While this comment provided some support for the yen, its overall impact remains notably weaker than the momentum behind the dollar's rise. Although Japan's imported inflation pressure is increasing, the dollar's interest rate advantage continues to significantly suppress the yen's performance.
ING analysts forecast that Japan's first-quarter GDP grew by approximately 0.3% quarter-on-quarter, essentially flat compared to the previous quarter. While the energy shock from geopolitical conflicts has a limited impact on economic growth, its effect on inflation is more substantial. ING projects Japan's April inflation rate to be around 1.8%. Although government subsidy measures are temporarily curbing some price increases, keeping overall inflation in check for now, pressure from energy-related costs persists.
From a technical perspective, USD/JPY has established a clear uptrend on the daily chart. After consecutively breaching the 157 and 158 levels, bullish momentum has further strengthened. The area around 158.50 has now transformed into a key short-term support zone. If the pair maintains its footing above this level, the market may attempt a further advance toward the 160 threshold. On the 4-hour chart, USD/JPY maintains a robust upward structure in the short term. The MACD indicator continues to operate above the zero line, indicating that bullish capital remains dominant. Meanwhile, the RSI is approaching overbought territory, suggesting some short-term overheating risk. If the dollar continues to draw support from safe-haven flows, the exchange rate could set new highs. However, if the Bank of Japan signals more definitive rate hikes, it could trigger a short-term correction.
Additionally, markets are monitoring the possibility of renewed intervention by Japanese authorities in the currency market. Previously, when USD/JPY rapidly approached the 160 level, Japan's Ministry of Finance intervened to stabilize the exchange rate. Consequently, the 160 level has become a critical psychological and policy watchpoint for the market.
The core drivers behind the current rise in USD/JPY stem from expectations of high U.S. interest rates, global safe-haven demand, and inflation concerns fueled by rising energy prices. Although domestic inflationary pressures are mounting in Japan and the Bank of Japan has begun signaling policy adjustments, the overall interest rate differential still clearly favors the dollar. In the near term, USD/JPY is likely to maintain its strong posture. However, as the exchange rate gradually approaches the key 160 area, the risk of potential intervention by Japanese authorities is increasing. Moving forward, markets will focus closely on Federal Reserve policy, developments in the Middle East, and the Bank of Japan's subsequent interest rate path.
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