The USD/JPY pair remained firm on Friday, trading near the 159.20 region while staying within this week’s established trading range. Traders appeared reluctant to place aggressive bullish positions near the key 160.00 psychological level following suspected intervention by Japanese authorities in late April. Despite the cautious tone, the pair remains on track for a second consecutive weekly gain.

The US Dollar continued drawing support from ongoing geopolitical uncertainty in the Middle East. Diplomatic negotiations aimed at ending tensions between the United States and Iran have shown little meaningful progress, while disagreements surrounding Iran’s nuclear program continue to cloud the outlook. As a result, investors maintained demand for the Greenback as a defensive asset.

The DXY remained close to six-week highs near 99.32, reflecting broad US Dollar strength against major currencies.

At the same time, elevated Oil prices continued pressuring the Japanese Yen. Japan remains heavily dependent on imported energy, with a large share of crude Oil supplies passing through the Strait of Hormuz. Ongoing disruption risks in the region have raised concerns about higher import costs and worsening inflation pressures for the Japanese economy, weakening the Yen’s appeal.

Additional support for the US Dollar came from weaker US consumer sentiment data alongside rising inflation expectations. The University of Michigan Consumer Sentiment Index dropped to 44.8 in May from 48.2 previously, while one-year inflation expectations increased to 4.8% from 4.5%. Longer-term inflation expectations also climbed sharply.

The rise in inflation expectations reinforced market speculation that the Federal Reserve could maintain restrictive monetary policy for longer or even consider another rate hike later this year. Christopher Waller stated that rising short-term inflation expectations are “alarming” and warned policymakers may need to respond if inflation pressures intensify further.

Meanwhile, softer-than-expected Japanese inflation data did little to weaken expectations that the Bank of Japan may still proceed with a rate hike during its June meeting.

Trade Idea

Buy USD/JPY above 159.20 targeting 160.00, with support near 158.40. Monitor intervention risks, Oil prices, Fed expectations, and Middle East headlines for potential volatility and reversals.