The foreign exchange market has been quite interesting lately. The repeated changes in the situation between the U.S. and Iran are deeply influencing the direction of exchange rates, especially the Japanese yen, where volatility has indeed been very high.

Last week, the U.S. dollar index fell by 0.37%, and non-U.S. currencies generally strengthened. The euro rose by 0.57%, the yen also rose by 0.26%, and the Australian dollar and the British pound gained 0.57% and 0.41%, respectively. It looks like risk sentiment has improved, and the market is digesting expectations that the U.S. and Iran may reach a peace agreement.

First, let’s talk about the euro. Expectations that the U.S.-Iran situation will ease have lowered the dollar’s risk premium. In addition, European Central Bank officials have hinted that if the Iran conflict is resolved and energy prices fall, rate hikes could begin in June—this has given the euro substantial support. The OIS market currently expects an 80% probability of an ECB rate hike in June. By contrast, although the Federal Reserve’s rate-hike bets have increased, the market generally believes that interest rates will remain unchanged throughout the year, which creates a stark contrast. Next, the focus should be on U.S. economic data. Last week’s April non-farm payrolls beat expectations; if this week’s CPI data also comes in above expectations, it will reinforce expectations of Fed rate hikes and, in turn, may weigh on the euro. Of course, if tensions in the Middle East heat up, it would also be unfavorable for the euro.

The yen is even more worth watching. While USD/JPY fell by 0.26% last week, during the trading session it once came close to 155. The market widely believes that this was Japan’s authorities stepping in again. Previously, on April 30, Japan’s authorities carried out the first round of currency intervention of the year, forcibly pushing USD/JPY from the 160 level to below 156. Now, the market believes the intervention line is being moved up from 160. An analysis by Sumitomo Mitsui Banking Corporation notes that once the yen approaches 158, Japan’s authorities may intervene again.

However, there’s a problem here: the Japan-U.S. interest rate differential is as high as 300 basis points. Such a huge spread continuously drives carry trades, which may cause the effect of exchange-rate intervention to be short-lived—here is the real key point. This week, Bessent will visit Japan. If this U.S. Treasury Secretary can persuade the Japanese prime minister to agree to a rate hike in June, the yen appreciation trend can truly continue. At present, the interest-rate market is pricing in a 68% probability that the Bank of Japan will raise rates in June.

From a technical perspective, USD/JPY has already dropped below the 100-day moving average, but it remains above the 200-day moving average. The short-term resistance level is 158. Once it breaks through 158, it could open up more room to the upside. Conversely, if it moves down, the support level is at 155. The 155–158 range is indeed quite volatile for this kind of sideways-to-range-bound trading.

Overall, this week’s focus is Bessent’s visit to Japan, the U.S. CPI and PPI data, and developments in the U.S.-Iran situation. If Bessent gives his endorsement to Japan’s exchange-rate intervention or urges the Bank of Japan to hike rates, USD/JPY could fall significantly. If U.S. inflation comes in above expectations or the Middle East situation escalates, the exchange rate could swing in the opposite direction. This week’s yen outlook is definitely worth close attention.