Could USD/JPY break 155.00 handle?
Could USD/JPY break 155.00 handle?
We have seen some big moves across financial markets today with oil prices sliding more than 10% amid optimism about a deal between the US and Iran to end the blockade in the Strait of Hormuz, before prices bounced back as fresh doubts emerged. With oil plunging earlier, stagflation worries receded sharply, and investors piled back into European stocks, metals and foreign currencies, while selling the US dollar.
The USD/JPY currency pair was apparently hit again by further dollar selling from Japan overnight, causing it to drop to near the 155.00 handle, before bouncing off its low. But a lot now depends on what oil prices do from here. Will the two sides agree to any deal?
Oil takes a plunge before rebounding
Risk appetite picked up sharply earlier today, with equities pushing higher as oil prices slid. The move followed a string of encouraging headlines on the US-Iran front. Late yesterday, US Secretary of State Marco Rubio confirmed that “Operation Epic Fury” had concluded, with its objectives met. Shortly after, Donald Trump announced a pause to “Project Freedom”, signalling room for negotiations with Iran. This was a step markets quickly interpreted as progress towards a deal, and so oil sold off after futures re-opened. Since then, prices haven’t looked back much, with Brent sliding to below $100. But then we saw a quick recovery following fresh headlines suggesting the two sides are perhaps not as close to agreeing a deal as markets made it out to be. Overall, market’s reaction suggests that the situation could soon be resolved. Let’s hope that is the case and we don’t see any fresh escalations.
Trump’s fresh ultimatum halts oil-slide
After the big drop in oil prices, Trump has just posted the following:
“Assuming Iran agrees to give what has been agreed to, which is, perhaps, a big assumption, the already legendary Epic Fury will be at an end, and the highly effective Blockade will allow the Hormuz Strait to be OPEN TO ALL, including Iran. If they don’t agree, the bombing starts, and it will be, sadly, at a much higher level and intensity than it was before. Thank you for your attention to this matter!”
Markets have reacted slightly negatively to this latest post, but essentially it doesn’t change anything. The key sticking point is whether Iran would agree to remove its highly enriched uranium from the country. That’s what the US president is presumably referring to. This is something Iran has rejected until now. If they do so again then that raises all sorts of risks again.
Attention to turn to US data
In recent days, the US dollar was regaining momentum as talks between the two sides had stalled and oil prices went high. On top of this, the Federal Reserve appeared to be gradually stepping back from its easing bias, and this was also supported by resilient US data and company earnings.
However, today, that trend has changed. While oil still remains elevated compared to pre-war levels, if the Strait of Hormuz fully reopens prices could fall even more. If so, that could further weigh on the dollar in the near term as rate cut expectations creep back higher. That should also allow attention to shift back to fundamentals.
It is worth pointing out that any sustained rebound in economic activity following any resolution could just as easily keep inflation sticky, preventing the dollar from sliding too much in the longer run. For now, though, markets are leaning into the positive narrative, which is benefiting the EM currencies the most. The likes of the euro and yen, currencies that had come under pressure because of the oil shock, were also benefitting largely from this slide in oil prices.
Meanwhile, today’s US ADP employment report was expected at +120k but it came in softer at +109. Attention will be on Friday’s key payrolls report.
Technical analysis and key levels to watch
Additional pressure on the dollar may have come from renewed Japanese activity in FX markets, as we saw renewed sudden drops in the USD/JPY overnight. Technically, the pair has now reached and reacted from the key short-term support around 155.00-155.50 area. This is where recent lows meet the support trend of the bullish channel. A break below here could pave the way for fresh selling in the days and weeks to come, data and oil permitting. Key resistance is now at 157.50 to 158.00 area. Lots of other short-term levels in between.
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