USD/JPY Price Forecast: Trading range breakout favors bulls amid Iran war escalation

The USD/JPY pair scales higher for the third consecutive day and climbs to the 159.00 neighborhood, or its highest level since January 23 at the start of a new week. The Japanese Yen (JPY) continues with its underperformance as the recent surge in Crude Oil prices threatens to weaken economic growth. This, along with a broadly firmer US Dollar (USD), turns out to be another factor pushing the currency pair higher.

The joint US-Israeli campaign against Iran enters its tenth day on Monday, with no signs of an end to hostilities. Meanwhile, Iran named Ayatollah Ali Khamenei's son, Mojtaba Khamenei, as the new Supreme Leader, signaling hardliners remain firmly in charge. US President Donald Trump said the appointment would be unacceptable and suggested the US should have a role in choosing Iran’s next supreme leader. This raises the risk of a prolonged war, which triggered a massive intraday rally of over 25% in Crude Oil prices on Monday.

Meanwhile, surging energy prices could drive up inflation and would create a classic stagflationary environment, complicating the Bank of Japan's (BoJ) normalization efforts and weighing heavily on the JPY. The USD, on the other hand, benefits from its unmatched status as the global reserve currency. Moreover, inflation concerns dim the prospects for near‑term rate reductions by the US Federal Reserve (Fed) and remain supportive of a further rise in US Treasury bond yields. This provides an additional boost to the USD and the USD/JPY pair.

Meanwhile, spot prices have now moved closer to the levels when authorities conducted a series of rate checks earlier this year, keeping the risk of actual market intervention. This, in turn, holds back the JPY bears from placing aggressive bets and caps the upside for the USD/JPY pair. Nevertheless, the aforementioned fundamental backdrop suggests that the path of least resistance for the currency pair remains to the upside. Hence, any meaningful corrective pullback might still be seen as a buying opportunity and is more likely to remain cushioned.

Traders now look forward to Japan's revised Q4 Gross Domestic Product (GDP) report, which will be released on Tuesday and is expected to show that the economy expanded at a faster pace of 0.3% against the preliminary reading of 0.1%. Apart from this, the latest US consumer inflation figures on Wednesday will influence the USD demand and provide a fresh impetus to the USD/JPY pair. The focus, however, will remain glued to geopolitical developments, which might continue to infuse volatility in the financial markets and drive the currency pair.

USD/JPY 4-hour chart

Technical Analysis:

The USD/JPY pair retains a mildly bullish near-term bias following a sustained breakout above a one-week-old trading range resistance near the 158.00 mark. Moreover, the Moving Average Convergence Divergence (MACD) histogram has turned marginally positive while the MACD line hovers close to the signal line just above the zero mark, hinting at improving but still moderate upside momentum. Adding to this, the Relative Strength Index around 64 stays below overbought territory, indicating buyers keep control without yet showing signs of exhaustion.

Immediate support emerges at the 158.00 trading range resistance breakpoint, with a deeper floor at 157.30 that guards the recent higher low area. A break below 157.30 would weaken the bullish bias and expose the 156.80 region as the next downside focus. On the topside, initial resistance appears at 158.90, the latest swing high, followed by 159.50, where an extension of the current move would encounter a more significant barrier. A sustained move above 158.90 would open the path toward 159.50, reinforcing the upside scenario in the 4-hour picture.

(The technical analysis of this story was written with the help of an AI tool.)