USD/JPY: How Much Further Will the US Dollar Fall?

• Ceasefire hopes pressure dollar and oil, lifting risk assets toward record highs.
• Softer inflation and weak sentiment revive expectations for future Fed policy easing.
• faces downside risk as bearish signals emerge near key resistance levels.

Markets were very eager to pile into the de-escalation narrative this week, and even the faintest hint that the US Hormuz blockade might be nudging things back toward talks has been enough to put , and the US dollar, under a fair bit of pressure, providing more than just relief for risk assets. Trump’s remark that Iran had reached out to restart negotiations only added fuel to the move, prompting another round of US dollar selling in the last couple of days.

From here, though, you’d need to see something more concrete on a lasting ceasefire to drag the US dollar all the way back to pre-war levels. That said, with the S&P 500 already back there and just 1% away from reaching a new record high, it wouldn’t be a huge surprise if other markets start to follow suit.

Could USD/JPY Drop to Pre-War Levels?

If we do get clearer signs that a proper ceasefire is coming together, you could see the US dollar yen exchange rate push below 158.00 and drift back toward those pre-war levels of 156.00ish. It might sound a touch counterintuitive given energy prices would still be relatively elevated, but with the Bank of Japan and other central banks sounding more hawkish than the Fed, the broader case for a softer US dollar against its peers still holds.

On the macro front, there is not much in the way of important data this week. We did have a weaker report yesterday, which was surprisingly weaker than expected. That came after last week’s data painted a softer picture of the US economy. Strip out the energy shock, and there’s a growing sense the Fed may have room to ease policy again down the line.

Take , for instance. The University of Michigan’s latest read showed confidence dropping to a record low, with the preliminary April index tumbling to 47.6 from 53.3. That’s a pretty stark move, likely reflecting the knock-on effects of the US-Israel-Iran tensions and renewed inflation worries.

That said, there’s a decent argument that this latest bout of inflation proves more temporary than the last. Yes, higher gasoline prices have pushed up headline numbers, but underlying inflation looks a bit more contained than feared. Demand isn’t exactly roaring, and firms don’t seem to have the same pricing power they did back in 2022, which should help keep a lid on things.

Will the BoJ Hold Fire for Now?

Meanwhile, the Bank of Japan Governor Kazuo Ueda has hinted that a rate hike at the 28 April meeting is unlikely, which has taken a bit of pressure off risk assets. Not long ago, markets were pricing in around a 70% chance of a move, following a run of hawkish signals earlier in the year. But that’s changed as geopolitical risks and crude oil prices have crept higher, raising growth fears.

The Middle East situation is particularly relevant for Japan, given it sources a vast majority of its oil through the Strait of Hormuz. Any prolonged disruption there leaves the economy exposed. Inside the BOJ, there’s now a bit of a split—some policymakers point to inflation hovering near the 2% target for years as justification for a hike, while others would rather sit tight and see how events unfold.

For now, the expectation is that the BOJ holds rates steady in April, but it will almost certainly nudge up its inflation forecasts while trimming its growth outlook.

USD/JPY Technical Analysis

We can see that this week’s candle has turned red after starting the week on a positive note. If it closes like this, it will mark the third consecutive bearish weekly candle for USD/JPY.

What’s notable here is that this price action is unfolding around the long-term resistance area near the 160.00 region — a level where we’ve previously seen significant declines in this currency pair. This suggests that the prior bullish trend may be weakening or, at the very least, losing momentum around this key resistance zone.

Looking at the Relative Strength Index (RSI), it also supports this view. The RSI has formed a lower high while the price has recently pushed to a higher high, indicating bearish divergence. This suggests that the latest move up from the early February lows may be running out of steam – as we already have seen.

That said, it’s still far too early to call a top. While the technical signals point to a more cautious USD/JPY forecast, we would need to see a break below key support levels to trigger fresh selling pressure. For now, price is still holding above major support levels on the longer-term timeframe, so it’s premature to suggest that the pair has topped out.

Key Technical Levels to Watch

In terms of levels to watch on the weekly chart, 158.88 stands out as a key level. It acted as resistance in December 2024, and that same level was retested a couple of times earlier this year before the price sold off, despite a brief break above it. In early March, we finally saw a decisive breakout above 158.88, but there has been very little follow-through buying since then.

With selling pressure emerging again near 160.00, this raises the possibility of another false breakout above 158.88 — although, again, it’s too early to draw firm conclusions.

Below 158.88, the next support level to watch is 157.66. This level previously acted as resistance and has since turned into support on multiple occasions, making it a key area for a potential retest.

Further down, 155.65 is another potential support level. This area is particularly important as it aligns with a bullish trendline that has been in place since April 2025. The trendline has been validated by several higher lows, most recently in February this year.

At this stage, only a clear break below this bullish trendline would confirm a broader reversal.

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Disclaimer: This article is written for informational purposes only; it does not constitute a solicitation, offer, advice, counsel or recommendation to invest as such it is not intended to incentivize the purchase of assets in any way. I would like to remind you that any type of asset, is evaluated from multiple perspectives and is highly risky and therefore, any investment decision and the associated risk remains with the investor.

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