USD/JPY forecast: US dollar strengths amid hawkish Fed despite recent oil weakness

The US dollar has extended its gains this morning, even if oil prices finished lower for the fifth consecutive day yesterday. Oil prices have bounced back in this first half of today’s session, causing a bit of pressure on currencies that rely on energy imports such as the euro, pound, Swiss franc, and Japanese yen. But it was the dollar that was exerting the most pressure, amid hawkish FedSpeak. Meanwhile, European indices and precious metals were also under a bit of pressure amid the strength of the dollar. With the Fed likely to remain hawkish, and not to mention the risks of further energy shocks, we maintain a bullish USD/JPY forecast for now. Even if oil falls further, this can lead markets to strip out tightening expectations from foreign central banks (such as the ECB and BoE) faster than Fed tightening expectations.

 

Earlier this week, risk appetite had improved amid the recent falls in oil prices, but things have started to roll over a bit in the equities space in Europe, despite the release of firmer PMI data this morning. Donald Trump’s speech at the UN that a deal could be possible after the election and Iran’s response to those claims seems to have poured cold waters on any hopes of an imminent deal. Barring any surprises in the US-Iran situation in the coming days, the US dollar could remain supported on any short-term dips, underpinning the near-term USD/JPY forecast.

 

Dollar regains poise as oil tries to stablise after recent falls

 

The US dollar turned higher following Trump’s speech and has extended those gains today.  This is despite the recent decline in crude oil prices and an overall positive risk sentiment. Traders are bidding up the greenback due largely to growing expectations that the interest rate differential between the US and the rest of the world including Switzerland, the eurozone and Japan, would expand further.

 

Even when oil was falling in the last few days, the dollar was proving surprisingly resilient. Normally, a sharp decline in crude would ease inflation expectations and take some pressure off US rates, weighing on the dollar. This time, hawkish Fed rhetoric is getting in the way.

 

Hawkish FedSpeak keeps USD/JPY forecast supported

 

Several Fed officials have spoken in recent days, and the message has been quite similar.

 

We heard from Chicago Fed President Austan Goolsbee earlier this week, warning that supply shocks, strong spending and AI-related investment could keep inflation sticky. Similar worries have also been highlighted by other hawkish Fed officials, arguing that the road back to 2% target may not be painless.

 

Yesterday, Richmond Fed President Thomas Barkin, who is a non-voter until 2027, reinforced that message yesterday, arguing that one rate hike may not be sufficient to bring inflation under control.

 

This increases the risk of gradual tightening to be front-loaded, which could further widen the interest rate differential between the US and countries where inflation is more subdued like Switzerland, or where the policy is still not as restrictive as it is in the US – such as Japan.

 

Meanwhile, recent data argues against the Fed turning dovish. Initial jobless claims fell back below 200,000 and ADP showed weekly hiring picking up to around 20,000 at the start of September.

 

Technical USD/JPY forecast and key levels to watch

 

 

The USD/JPY has now made back most of the losses from earlier this month, threating to resume its rally as it hovers near a bearish trend line and key resistance in the 158.00-158.50 region. Here we also have the 200-day average converging, making it a significant technical zone. A breakout above here would therefore be a bullish technical development, in which case the pair could quickly ascend towards the summer highs again, with 160.00 becoming the initial upside target. Support, meanwhile, is now seen around 157.35ish, 156.30ish and then 155.00.

 

In short, the path of least resistance is to the upside for the dollar. We therefore maintain a positive USD/JPY forecast for now, but are wary, at the same time, of intervention from Japanese authorities as the pair edges closer to that 160.00 level again.