The USD/JPY pair experienced profit-taking during Thursday's Asian trading session, snapping a three-day winning streak as the exchange rate settled back above the 159 yen level. Market participants have not formed a distinctly bearish outlook on the pair, primarily because the interest rate differential between the United States and Japan remains substantial, while the stickiness of US inflation data continues to limit the dollar's downside potential. Meanwhile, investors have begun adjusting their positions ahead of time, awaiting fresh policy signals from Tokyo consumer price data and the Jackson Hole global central bank symposium.

Recent signs of easing tensions in the Middle East have exerted divergent influences on the safe-haven appeal of the dollar and the yen. Market expectations for a ceasefire arrangement between the US and Iran have gained traction, while reports of a gradual resumption of commercial shipping through the Strait of Hormuz have reduced concerns over energy supply disruptions. As demand for safe-haven assets diminishes, the dollar has begun giving back some of its earlier risk premium, while the yen has received modest support. However, this impact is largely confined to short-term capital flows and is not yet sufficient to fundamentally alter the interest-rate-driven dynamics that dominate the USD/JPY pair over the longer term.

US inflation data continue to provide fundamental support for the dollar. The July Personal Consumption Expenditures price index rose 3.7% year-over-year, matching the June pace and exceeding the market consensus of approximately 3.6%. Core PCE advanced 3.3% on an annual basis, with a month-over-month increase of roughly 0.2%. This indicates that the Federal Reserve's preferred inflation gauge remains significantly above its 2% long-term target, and price pressures have not shown sufficiently pronounced further cooling. Notably, real consumption growth slowed considerably in July.

The combination of persistent high inflation and softening demand presents the Fed with a more complex policy environment. If inflation remains above target, the central bank cannot quickly pivot toward easing; however, if consumption and economic activity continue to decelerate, maintaining a restrictive stance could increase downside risks to the economy. Consequently, market assessments of the Fed's next policy moves are shifting from a singular focus on inflation data to a broader evaluation encompassing employment, consumption, and financial conditions.

Market participants have begun raising their expectations for another Fed rate hike this year. Some market pricing indicates that the probability of a September rate increase has climbed from approximately one-third before the PCE release to roughly 40%, though discrepancies across different data sources suggest investors have not yet reached a highly consensus view on policy. This is precisely why Friday's Jackson Hole symposium is attracting significant attention. Fed Chair Kevin Warsh is scheduled to deliver a key address, and markets are hoping for clues on the future rate path, inflation targets, and concerns over long-term Treasury yields. Given the elevated levels of long-term US yields, how the Fed characterizes inflation persistence and financial conditions will directly influence the dollar and the USD/JPY trajectory.

Should Warsh signal a more hawkish stance, emphasizing that inflation remains too high, that policy must stay restrictive, or explicitly indicating readiness to raise rates further if necessary, short-end US yields could continue climbing, potentially driving USD/JPY back toward the 160 threshold. Conversely, if he highlights slowing consumption, economic growth risks, and the need for policy flexibility ahead, the dollar could face downward pressure, allowing the yen to strengthen further on narrowing rate differential expectations.

On the Japanese side, the core contradiction for the yen remains the tension between strengthening rate hike expectations and persistent fiscal and yield spread pressures. Market expectations for further Bank of Japan tightening have intensified, with some institutions even bringing forward their next hike projection to September. If the BOJ continues signaling a normalization trajectory, it would enhance the yield attractiveness of yen-denominated assets and undermine the foundation for USD/JPY to maintain elevated levels over the long term. However, even if Japanese rates are raised further, they may not be sufficient in the near term to fully reverse the interest rate structure favoring the dollar. The gap between US policy rates and Japanese rates remains substantial, and Japan's fiscal position, government financing needs, and domestic long-term yield dynamics will all factor into yen valuation. Therefore, while the yen possesses room for appreciation, whether that rebound can translate into a sustained uptrend depends on whether the pace of BOJ rate hikes and the magnitude of US rate declines move in tandem.

From a daily chart perspective, USD/JPY encountered notable resistance near 160 following its consecutive advances, and the current pullback represents a normal correction after an upward move. The 159 level serves as the first critical observation area. If the pair can stabilize above 159, the daily bullish structure remains intact; a breakout above 159.63 would bring 160.66 and 162.13 into focus, while a resurgence of strong dollar buying could target the previous high region near 163.99 as a longer-term resistance zone. Conversely, a decisive break below 159, followed by a loss of the 158.88-158.60 area, would signal a marked weakening of short-term upward momentum, potentially leading to a test of support near 157.33. Further downside would target the 155.27 level. Overall, the daily trend has not yet completed a clear reversal, and the current phase more closely resembles a direction-selection period within high-level consolidation. Whether USD/JPY can hold 159 will be a key indicator of short-term trend strength.

At the 4-hour level, the pair continues to trade above the 100-period simple moving average, which currently sits near 158.88, indicating that the medium-term bullish structure has not been fully undermined. Fibonacci retracement levels show the 38.2% position at approximately 158.60, while the 50% level is around 159.63, making 159.63 both a near-term resistance and a crucial marker for determining whether bulls can reclaim control.

In summary, USD/JPY has entered a critical phase of policy expectation positioning. US July PCE held at 3.7% year-over-year with core PCE at 3.3%, confirming that inflation remains well above the Fed's 2% target and providing fundamental support for the dollar. At the same time, rising BOJ rate hike expectations and easing Middle East tensions are capping further upside for the pair. The Jackson Hole symposium represents the biggest near-term variable. If Warsh leans hawkish, USD/JPY could challenge 160 or higher; if he signals a dovish tilt, a break below 159 could open the door to deeper corrections.