USD/JPY pushed above 160 for the first time in a month after Fed Chair Kevin Warsh signaled the central bank still has more tightening to do. The move followed a jump in rate-hike odds and a fresh escalation in the Middle East that sent Brent crude back above $90 a barrel.
USD/JPY broke above the 160 mark for the first time in a month, though it failed to hold the level on the first attempt. The dollar's advance came after Kevin Warsh's hawkish rhetoric lifted the currency against its major peers.
Warsh says policy still isn't restrictive enough
The recent slowdown in inflation did not change Warsh's view. He considers current monetary policy insufficiently restrictive and maintains the central bank still has a lot of work to do. That rhetoric pushed Treasury bond yields higher, put the brakes on stock indices and boosted the greenback.
As a result, futures markets raised the probability of a September Fed rate hike from 38% to 60%. CME derivatives now put the probability of two federal funds rate hikes in 2026 at 49%, up from 21% before Warsh's Jackson Hole speech.
Middle East escalation adds to the pressure
The conflict in the Middle East is also feeding rising economic indicators. The US bombed Iran for the first time since 29 July, and Tehran responded with attacks on American bases in Jordan. Brent crude rose back above $90 per barrel, heightening the risk of accelerating inflation and pressuring the Fed toward tighter policy.
Yen shorts build as Bessent testifies
Speculators have been building short positions on the yen for a second straight week, suggesting further attempts on 160 will follow. The pair has already recouped half of its losses from a currency intervention that totalled a record $98.7 billion.
Treasury Secretary Scott Bessent was forced to explain to Congress Washington's involvement in that coordinated intervention. He told lawmakers Japan is the largest holder of Treasuries, and erratic yen moves could destabilise financial markets and raise US borrowing costs. Bessent has no intention of telling the Bank of Japan what to do, but added the BoJ must have a clear understanding of the situation, since Japan has reached the end of Abenomics.
That reading points to a possible rate rise at the BoJ's September meeting. Futures markets now put the probability of BoJ tightening at over 80%.
Source: ActionForex
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