The recent volatility in the foreign exchange market is indeed quite interesting. Last week, the US Dollar Index rose by 0.69%, and non-USD currencies were generally under pressure. The euro, yen, and pound all fell by more than 0.6%, while the Australian dollar dropped by 2.18%. The logic behind this is worth pondering.

First, let’s talk about the euro. The decline may not look large, but the drivers behind it are extremely complex. The escalation of the situation in the Middle East has hurt the EUR/USD exchange rate, mainly because large amounts of safe-haven funds have flowed into the US dollar. After Iran refused the ceasefire agreement, oil prices surged again, directly lifting inflation expectations. The market now no longer expects the Federal Reserve to cut interest rates this year, and it has even started pricing in the possibility of rate hikes this year. Although the ECB is also considering rate hikes, what the market is more worried about is the impact of rising energy prices on the Eurozone economy, so the EUR/USD exchange rate has remained under sustained pressure.

The next key factor is the non-farm payroll data. If the US March non-farm payroll figures come in below expectations, it could give the euro a chance to catch its breath, and in the short term, EUR/USD may rebound. But to be frank, as long as the Middle East situation doesn’t cool down, it will be hard to shake the US dollar’s safe-haven status, and EUR/USD is likely to remain under pressure. From a technical perspective, EUR/USD is still trading below the 21-day moving average, and bearish momentum is fairly strong.

What is even more worth paying attention to is the yen. Last week, USD/JPY rose by 0.63%, breaking above the key level of 160. This is not a small matter for Japanese authorities, because 160 is the level they intervened at last year. Jun Muramura, a Japanese finance official, recently said that if this situation continues, decisive measures will soon have to be taken. Those remarks sound like a warning to the market, implying that intervention may be close at hand.

What’s interesting is that analysis from Mitsubishi UFJ Morgan Stanley Securities notes that if the Japanese government were to use buy-side intervention on the scale of 3 trillion yen, it could theoretically make the yen appreciate by 4 to 5 yen. The problem is that if, after the intervention, the Middle East conflict escalates again, the effect of yen appreciation could vanish within days. The root cause of yen depreciation is the combination of a strong dollar and surging oil prices, with the transmission chain being: “Middle East deteriorates → oil prices rise → Japan’s terms of trade worsen → demand for the dollar increases → yen depreciates.”

Okasan Securities has even predicted that if Japan does not intervene, USD/JPY could surge to 162. So this week’s focus is whether the Japanese government will act and how the Middle East situation will unfold. If the situation continues to escalate and oil prices rise further, USD/JPY may still have room to keep climbing. But once the Japanese government intervenes, the exchange rate could drop sharply.

From a technical perspective, after USD/JPY broke above 160, it opened up more room for upside movement. The next resistance level is the prior high of 161.95. Conversely, if it falls and loses the 21-day moving average at 158.6, the support level would be 154.5.

Overall, this week’s FX market exchange rate movement mainly depends on two things: US non-farm payroll data and the stance of the Japanese government. Any whiff of change in the geopolitical situation could trigger sharp fluctuations in exchange rates, which is also why uncertainty in the FX market has been so high recently.