The recent weeks have seen the US-Iran situation fluctuate repeatedly, causing some chaos in the foreign exchange market. Last week, the euro dollar rose by 0.34%, and the yen also appreciated, but the upward process was not smooth—initially, market rumors suggested the US and Iran were close to a deal, only for the situation to turn around with the Strait of Hormuz closing and ships being detained, while Trump threatened to destroy infrastructure. This back-and-forth really makes it hard to judge.

I’ve noticed that in this market movement, the euro dollar has become a barometer of risk sentiment. When the market is optimistic, the dollar is sold off, and the euro dollar surges; once tensions rise, safe-haven buying pushes the dollar back. Last week, it peaked around 1.185 before retreating, and now it’s stuck between 1.170 and 1.185. Mitsubishi UFJ believes that as long as crude oil doesn’t spike and stocks don’t fall sharply, the dollar still has room to weaken in the short term, but SocGen insists that the dollar remains strong in the medium to long term—that’s where the market’s disagreement on the dollar outlook lies.

On the other hand, the Bank of Japan’s rate hike expectations are rapidly cooling. Ueda Kazuo has recently not signaled a rate hike in April, and the market’s probability of a rate increase has dropped from 50% to less than 20%. This is actually negative for the yen—if the central bank doesn’t raise rates, carry trades will become active again, and the yen could be pressured to 162 or even higher. Moec Katayama has already announced plans for bold intervention, but talk alone isn’t enough.

The key going forward remains the US-Iran negotiations. If the situation escalates, the BOJ’s rate hike expectations will be further undermined, and the euro dollar pair may need to be re-priced. From a technical perspective, if the euro dollar can regain above 1.185, there’s still room for further gains; USD/JPY will fluctuate between 157.5 and 160.5, depending on risk sentiment and central bank stance. This week’s focus is on the Warsh hearing and the US-Iran situation—any change could trigger a re-adjustment of the exchange rates.