The USD/JPY pair edged higher during the Asian session on Tuesday, trading around 158.80 and remaining close to the three-week peak touched last week. The market is watching to see if the pair can decisively break above the key psychological level of 159.00 to confirm the formation of a new uptrend.

Recent developments in the Middle East continue to be a core driver of volatility in the currency markets. Over the weekend, optimism briefly emerged that the U.S. and Iran might reach an agreement to end the nearly three-month-long conflict and reopen the Strait of Hormuz. This expectation led to a temporary pullback in the U.S. dollar as risk appetite improved. However, the situation has since shifted again. On Monday, the U.S. military conducted what it described as "self-defense strikes" on missile facilities in southern Iran. Although the U.S. emphasized restraint during the ceasefire period, market concerns about escalating tensions in the Middle East have reignited. Against this backdrop of heightened geopolitical risk, safe-haven demand for the U.S. dollar has regained support. The dollar index had previously fallen to a more-than-one-week low, but as risk sentiment deteriorated, capital flowed back into dollar-denominated assets, driving a rebound. As a typical risk-sensitive currency pair, USD/JPY has consequently gained further upward momentum. Simultaneously, expectations that the U.S. Federal Reserve will maintain a hawkish policy stance continue to support the dollar. Recent U.S. inflation data has shown persistent stickiness, and the overall U.S. economy remains robust, fueling market expectations that the Fed will keep interest rates high for an extended period. Some market participants have even begun discussing the possibility of further rate hikes in the future. The high-interest-rate environment enhances the yield advantage of U.S. dollar assets, attracting continued global capital inflows into U.S. markets. In contrast, although the Bank of Japan (BOJ) has gradually exited its ultra-loose monetary policy, overall interest rates in Japan remain significantly lower than those in the U.S. The persistently wide interest rate differential between the U.S. and Japan is a key factor driving the long-term uptrend in USD/JPY. On the other hand, Japan's economy faces risks related to energy supply. Due to Japan's heavy reliance on energy imports, turmoil in the Middle East could keep crude oil and natural gas prices elevated, increasing cost pressures for Japanese businesses and consumers. Market concerns that Japan's economic recovery could be hampered further weigh on the yen's performance. However, the market remains somewhat cautious about further gains in USD/JPY. Japan's Ministry of Finance (MOF) and the BOJ have repeatedly issued verbal warnings and even directly intervened when the exchange rate approached the 160 level. Investors are generally concerned that if the pair rapidly approaches 160 again, Japanese authorities may take action to support the yen. Analysts point out that the Japanese government's primary concern is not the depreciation of the yen itself, but the impact of excessive exchange rate volatility on financial markets and import costs. Therefore, even if the BOJ finds it difficult to raise interest rates significantly in the short term, Japanese officials may intervene in the foreign exchange market to curb an excessively rapid decline in the yen. This week, the market will also focus on key U.S. economic data. The Conference Board's Consumer Confidence Index, due Tuesday evening, could influence market assessments of U.S. consumption and economic prospects. Stronger-than-expected data could provide further support for the dollar; conversely, weaker data might temporarily cap its gains. From a technical perspective on the daily chart, USD/JPY has been rebounding steadily from lows near 155.00 and is now approaching the key resistance zone around 159.00. The 20-day and 50-day moving averages have re-formed a bullish alignment, indicating the overall trend remains strong. The MACD indicator has moved back above the zero line, with the red momentum bars expanding, suggesting strengthening bullish momentum. Key immediate resistance levels are at 159.00 and 160.20. A decisive break above 159.00 could see the pair retest the year's highs. Key support levels below are located near 157.80 and 156.50. A break below 156.50 could damage the short-term bullish structure. However, given the persistent risk of intervention by Japanese authorities, market caution is likely to increase significantly in the 159-160 zone. Any stronger warnings from Japan's MOF could trigger a rapid correction in USD/JPY. Overall, the current USD/JPY movement is primarily driven by three factors: expectations of sustained high U.S. interest rates, safe-haven demand stemming from the Middle East, and pressures on the Japanese economy. However, the potential risk of intervention by Japanese authorities remains the market's most significant variable.