Don't bet against the dollar

USD/JPY

Key zone: 162.00 - 162.80

Buy: 163.00 (on a pullback after retesting 162.50) ; target 164.50-165.00; StopLoss 162.30

Sell: 161.50 (on strong negative fundamentals) ; target 160.00-159.50; StopLoss 162.20

The U.S. dollar recovered part of its recent losses thanks to weakening global risk appetite and hawkish rhetoric from FOMC officials. Federal Reserve policymakers convinced the market that they remain prepared to tighten monetary policy if inflation fails to continue moving toward the 2% target. However, with the renewed escalation of the conflict in the Middle East, such a scenario now appears increasingly unlikely.

The sell-off in technology stocks is boosting demand for the U.S. dollar as a safe-haven asset.

Although the futures market has abandoned expectations of a federal funds rate hike in June, it still anticipates further monetary tightening in 2026. The probability of such an outcome is currently estimated at 81%. Moreover, the higher oil prices climb, the more likely the Federal Reserve will be forced to take action—and the more supportive that becomes for the dollar.

Reminder:

June retail sales growth in the United States has now pointed to the resilience of the U.S. economy for eight consecutive months. This time, stronger consumer demand was largely driven by lower gasoline and natural gas prices, although the impact of this factor is likely to be temporary. The renewed conflict in the Middle East threatens to weaken retail activity in the near future.

But this is not the time to bet against the American consumer—you are likely to lose.

• Market corrections are becoming increasingly complex and prolonged. The dollar continues to hold the initiative, European currencies remain unable to establish a clear direction, and the yen is struggling to avoid further depreciation. The dollar is simply waiting for Europe and Japan to exhaust all available resources in their attempts to stabilize the situation.
• The strengthening U.S. dollar allowed USD/JPY to resume its rally. As a result, Japanese Finance Minister Satsuki Katayama returned to verbal intervention. According to the minister, the government is prepared to take decisive action at any time if necessary. These comments came ahead of a holiday weekend in Japan, giving authorities an opportunity to intervene in a relatively thin foreign exchange market.
• The market has stopped treating the yen solely as a derivative of the greenback's performance. In recent weeks, the primary driver has been the yen's own structural weakness rather than dollar strength. As a result, even on days when the DXY declines, USD/JPY either holds its ground or retreats only marginally.

What does this mean?

Just a few months ago, investors expected at least one Bank of Japan rate hike before the end of the year. Those expectations have now been significantly revised. Japan's economy continues to show weak domestic demand, real household incomes remain under pressure, and recent macroeconomic reports point to slowing business activity. Under these conditions, the Bank of Japan has virtually no room for further interest rate increases, at least in the foreseeable future.

At the same time, the carry trade strategy continues to gain momentum. Even if markets begin pricing in a more dovish Federal Reserve, Japan's funding costs remain so low that investors continue selling JPY and investing borrowed funds into higher-yielding assets, automatically supporting demand for USD/JPY.

Therefore, currency interventions alone are unlikely to save the yen. USD/JPY risks climbing toward the 170 area, as indicated by the performance of U.S. and Japanese equity indices, the interest rate differential between the Federal Reserve and the Bank of Japan, and the dynamics of CNH/JPY.

For the third consecutive week, traders have attempted to approach the 163.00 level, but so far without success. Even during periods of dollar index weakness, USD/JPY buyers remain confident, using virtually every meaningful pullback as an opportunity to establish new long positions.

Following the breakout above the key resistance level, a new correction zone and buying area have been established. The overall trading strategy remains unchanged: buy the dollar after structural corrective declines. No clear entry signals have formed yet, but the broader market backdrop remains decisively bullish.

So we act wisely and avoid unnecessary risks.

Profits to y’all!