USD and USD/JPY Lose Momentum Amid Risk Recovery

The US dollar rally lost momentum as markets shifted from panic to cautious optimism about the Iran conflict. Oil prices initially surged on fears that supplies through the Strait of Hormuz could be disrupted but later reversed as traders began to believe the conflict might not last as long as feared.

Earlier safe-haven demand had pushed the US dollar and USD/JPY higher, but improving risk sentiment and easing oil volatility helped stall those rallies.

From a technical perspective, the US dollar index (DXY) failed to break above the 100 level and formed a bearish outside day near 99.70, suggesting the rally may have reached a short-term top and could see a pullback. The next move will likely depend on whether geopolitical tensions fade and how upcoming US economic data affects expectations for Federal Reserve policy. After last week’s weaker-than-expected nonfarm payrolls report, traders are closely watching the upcoming CPI and PCE inflation data, as softer inflation could revive expectations of a Fed rate cut and weigh on the dollar.

DXY Daily Chart

USD/JPY also shows signs of a possible short-term top, with a shooting star candle forming near resistance and a minor bearish divergence appearing on the RSI. A move lower could target the 157 level first, followed by 156.44 if selling pressure continues.

USD/JPY Daily Chart

Overall, markets have priced out the worst-case scenario of a prolonged oil supply disruption, but geopolitical uncertainty remains. If tensions continue to ease and US data weaken, the US dollar could face further short-term pressure.