On Tuesday, July 28th, the USD/JPY pair traded around 163.80, remaining in a high range. The exchange rate did not weaken further despite the temporary easing of the Middle East conflict and the rapid decline in oil prices; instead, it regained support ahead of the Federal Reserve's interest rate meeting. The core market focus has shifted from simple safe-haven demand to the repricing of expectations regarding US and Japanese monetary policies. The Federal Reserve will announce its interest rate decision on July 29th, while the Bank of Japan will hold its policy meeting on July 30th and 31st. This close timing makes the USD/JPY pair one of the most sensitive prices in macro trading this week.

Why did the dollar still rebound despite the easing of tensions and lower oil prices?

Following the US suspension of military operations after several days, Iran stated it would continue to abide by the ceasefire agreement as long as the other side exercised restraint. The market accordingly lowered its risk premium for energy supply disruptions, leading to a significant drop in international crude oil prices on Monday, with some contracts falling by more than 6%, and Brent crude currently hovering around $84. Cooling energy prices typically alleviate imported inflationary pressures and weaken the safe-haven premium for the US dollar, but the dollar/yen pair quickly recovered its losses after a brief decline. This trend suggests that the dollar's rebound was not driven by a single fundamental improvement. During the same period, the yield on the 10-year US Treasury bond fell to around 4.6%, and stock market performance was also quite divergent, failing to form a typical structure of rising interest rates and a strengthening dollar. A more reasonable explanation is that the market concentrated on adjusting short exposures ahead of the Fed's decision, while simultaneously re-incorporating the tail risk of policy surprises. In other words, this round of gains is more about event risk hedging than a comprehensive strengthening of the dollar's medium-term logic. While the drop in crude oil prices has eased short-term inflation concerns, the ceasefire remains fragile, and the risks to navigation in key shipping areas have not completely disappeared. As long as uncertainty regarding energy supply persists, the market will not completely withdraw from dollar-liquid assets.

The Federal Reserve's decision to hold rates steady does not mean that policy risks have disappeared.

The Federal Reserve's current target range for the federal funds rate is 3.50% to 3.75%, unchanged since the beginning of 2026. The base case scenario for the July meeting remains maintaining interest rates, but persistently high inflation above the 2% target, coupled with the recent surge in energy prices, makes a rate hike by a minority of committee members a possibility the market cannot rule out. Recent surveys show that most economists expect rates to remain unchanged this year, but the number of those who believe there is a high risk of another rate hike has increased. In mid-July, Federal Reserve Chairman Kevin Warsh reiterated at a congressional hearing that the goals of price stability and full employment remain unchanged. In a June press conference, he further emphasized that the Fed will clearly deliver on its 2% price stability goal. These statements imply that the focus of policy discussion is no longer on whether to prioritize inflation, but rather on whether the month-on-month rate of inflation will decline continuously in the coming months. Therefore, what truly affects the dollar at this meeting is not the interest rate decision itself, but the wording of the statement, the voting structure, and Warsh's tolerance for monthly inflation. If the decision maintains interest rates and does not signal an early tightening, some of the currently accumulated event-hedging positions may be unwound. If dissenting votes are cast for a rate hike, or if a statement reinforces concerns about a second wave of energy shocks, the market will likely raise expectations for short-term US interest rates again, and the upward pressure test on the USD/JPY pair may continue.

The key issue for the Bank of Japan is not this rate hike, but the next one.

The Bank of Japan (BOJ) raised its policy rate from 0.75% to 1.00% in June, reaching a 31-year high. The market widely expects the BOJ to hold rates steady at this week's meeting to assess the combined impact of previous rate hikes, rising energy costs, and the yen's depreciation on the economy. The BOJ will also release its latest economic and price outlook, including growth forecasts, core inflation projections, and a description of exchange rate transmission, which will be more informative than the interest rate decision. Market focus has shifted significantly recently. Some BOJ officials believe that the weak yen is increasing import costs and inflation risks, thus the market has shifted its focus for the next rate hike from the end of the year to the fall. Even if rates are not adjusted at this meeting, the yen yield curve could still be repriced if BOJ Governor Kazuo Ueda acknowledges that the exchange rate's transmission to underlying inflation is strengthening. The problem is that even with rates at 1.00%, the nominal interest rate differential between the US and Japan remains large. Unless the Federal Reserve clearly shifts to easing and the BOJ is unwilling to raise rates rapidly and continuously, the carry trade structure will not disappear automatically. It is important to distinguish between a temporary strengthening of the yen and a trend of appreciation. The former can be triggered by policy rhetoric, while the latter requires a sustained narrowing of the interest rate differential between the two countries.

The area around 163.98 has become a technical dividing line for policy expectations.

From a daily chart perspective, the latest USD/JPY price is around 163.80, having traded between 163.10 and 163.86 over the past few days. The exchange rate reached a high of 163.983. The Bollinger Bands have a middle band at 162.414, an upper band at 163.949, and a lower band at 160.878. The price has approached and even briefly broken through the upper band, indicating a strong short-term trend, but also suggesting that the upward momentum after the expansion of volatility is facing a test. In the MACD indicator, the fast line is at 0.707, the slow line is at 0.624, and the histogram is at 0.166, all still above the zero line, reflecting relatively strong short-to-medium-term momentum. However, the exchange rate has shown consecutive short bodies after approaching the 164 area, indicating that new funds are beginning to await confirmation from policy information.