- The USDJPY forecast for next week is for the pair to continue being supported by the oil shock situation in the Middle East.
The USD/JPY is trading around the 160.00 price mark, with the pair obeying the classical oil risk premium -> inflationary shock -> higher rates tape. The scenario means that higher US bond yields keep the greenback on bid, while the major oil importer in this pairing (Japan) sees its currency (the Yen) on offer. The spike in oil prices has been damaging for the Yen, allowing the USD/JPY to hit multi-year highs. If there is any currency pair that fits the oil shock -> higher rates playbook, it is the USD/JPY.
What is Driving the USD/JPY Forecasts Right Now
1. Oil shock -> inflationary fears -> higher US bond yields
The number one driver of USD/JPY forecasts is currently the oil risk premium. The situation currently supports the USD as a safe-haven asset, and higher bond yields are attracting investment into USD-denominated assets, boosting demand for the greenback. Following Fed easing expectations in Q4 2025, the market is now pricing in a rate hike by year-end due to expected inflationary pressures from higher oil prices.
2. Slow pace of BoJ normalization
The Bank of Japan remains in normalization mode. What started as a response to inflationary pressures from local wage hikes has transformed into a situation in which the country now faces inflationary pressure from the Middle East through higher energy import prices. Former BoJ Governor Kuroda has even suggested the potential for 3-4 rate hikes, taking the interest rate to 1.5% in 2027. However, markets are pricing in one near-term hike, which may be mildly supportive of the Yen but not enough to offset the current risk premium.
3. BoJ intervention risk
The Finance Minister of Japan has fired off a warning about speculation driven by the oil shock, indicating the authorities’ readiness to act decisively if needed. This kind of language in the past has led to the BoJ intervening to sell US Dollars to stabilize the Yen. The potential for BoJ intervention remains a key cap that limits a further push above 160.00.
What to Look For Next Week
1. Oil and geopolitics: expected to remain the primary driver for the pair. Escalation keeps oil elevated and supports the USD/JPY. Diplomacy cools oil prices, leading to a stabilization of the Yen.
2. US Yields/Fed repricing: Higher US yields will lead to a repricing of Fed rate policy to the hawkish side of the equation. This will provide tailwinds to the USD/JPY. However, any factor that brings cuts back to the table will cap the upside.
3. Japan policy and interventionist rhetoric: watch out for potential intervention if the price goes above 160.00.
USD/JPY Forecasts: Weekly Scenarios
Base case: choppy price action just below 160.00 as traders debate whether to add to bullish positions or watch out for BoJ intervention. Price expected to remain near weekly highs within the context of a range trade. As long as the oil risk premium persists, the pair will remain supported at the upper end of the range, even amid pullbacks driven by intervention fears.
Bull case: a further push in oil prices leads to further firming of US bond yields. If there is no sign of intervention, we could see a sustained breakout above 160.00. However, such a breakout would be highly volatile, and sharp pullbacks cannot be ruled out as markets interpret the headlines.
Bear case: A Yen relief rally is the hallmark of the bear case scenario. This will be triggered by a cooling of oil prices or by an intervention by the BoJ. The latter will lead to a transient response while the former is expected to be more sustained. However, if markets start to price in a more aggressive BoJ normalization, USD/JPY risks a heftier pullback.
UDS/JPY Technical Outlook
The USD/JPY continues to trade with upside momentum, pushing above the 157.63 resistance and reaching 160.00-161.86 within a broader bullish structure.
The pair is now approaching a key historical resistance where selling pressure was significant. The setup favours further upside if the pair remains above 157.63, with a break above 161.86 pointing to further targets at 163.79, the 27% Fibonacci extension of the 17 September 2025 to 16 March 2026 high.
On the flip side, a breakdown of the 157.62 support via a rejection at current highs targets the 38.2% Fibonacci retracement level at 154.54 initially, followed by the 152.69 low of 16 February.
