USD/JPY rose for a fourth straight day to about 159.75 in European trading on Thursday, supported by a stronger US Dollar. The move followed higher oil prices linked to an extended closure of the Strait of Hormuz.
The US Dollar Index was up 0.2% near 98.80, its highest level in more than a week. Higher oil prices lifted US inflation expectations, which reduced the likelihood of Federal Reserve rate cuts.
Fed Policy Expectations
CME FedWatch showed a 76.8% chance the Fed keeps rates at 3.50%–3.75% at its December meeting. Markets are also awaiting preliminary US S&P Global PMI data for April at 13:45 GMT, with business activity expected to rise on stronger manufacturing and services output.
The Japanese Yen traded mixed as attention turned to the Bank of Japan policy decision due on Tuesday, 28 April. USD/JPY kept a bullish near-term bias after a Descending Triangle breakout, with the 20-day EMA at 159.11 and RSI near 57.
Resistance levels were cited at 160.46, then 161.00. Support was noted at 159.41, then 159.11, with further support near 157.64.
Given the strength in the US Dollar, we should anticipate the USD/JPY pair to continue its upward trend. The prolonged closure of the Strait of Hormuz is a significant factor, having pushed Brent crude oil prices up nearly 18% over the past month to over $115 a barrel. This is fueling inflation expectations and making a Federal Reserve rate cut less likely.
Market Pricing Shift
This situation has forced a major shift in market expectations for Fed policy over the coming months. Just last month, we saw fed funds futures implying a 60% chance of a rate cut by year-end, but now those odds have almost completely evaporated. The CME FedWatch tool now shows a dominant probability of rates holding steady in the current 3.50%-3.75% range through December.
The underlying US economy appears solid, which supports a strong dollar and gives the Fed room to stay hawkish. We saw this pressure building after the March core CPI came in at 3.1% year-over-year, surprising analysts who had forecast a dip below 3%. An strong S&P PMI report for April would only reinforce this view of economic resilience.
On the other side of the trade, the Japanese Yen remains weak as we wait for the Bank of Japan’s meeting on April 28. After the historic but small rate hike we saw back in 2024, the BoJ has been extremely cautious, creating a wide policy gap with the Fed. This divergence is the fundamental reason the yen continues to weaken against the dollar.
For derivatives traders, this points toward strategies that benefit from further USD/JPY upside in the coming weeks. We should look at buying call options with strike prices targeting the 160.50 and 161.00 levels. The technical momentum is strong but not yet overbought, suggesting there is still room for the pair to climb.
However, we must be cautious as the pair approaches these multi-decade highs. These levels bring back memories of the verbal warnings from Japan’s Ministry of Finance we heard last year when the pair crossed 155. Using the 20-day EMA near 159.11 as a key support level for our bullish positions is a prudent way to manage the risk of a sudden reversal.
