USD/JPY Forecast: Dollar Extends Climb, Nears Key 160.00 Zone

USD/JPY extended its advance during the European session on Tuesday, with the pair climbing above 159.30 and moving closer to the closely watched 160.00 key psychological level. Market sentiment remained cautious, with investors broadly awaiting heavyweight economic data due later this week and the Jackson Hole global central bank symposium for clearer clues on the policy path ahead.

**US-Japan yield differential continues to underpin dollar bulls**

Recently, despite the dollar index retreating from highs due to easing geopolitical tensions and rate-cut expectations, the yen has failed to benefit, instead lingering near the 160 threshold. The core driver behind this is the structural yield differential created by the Bank of Japan's cautious pace of rate hikes versus the US maintaining high interest rates, which continues to attract carry trades and weigh on the yen. Market analysts note that this significant divergence in central bank policy stances makes it difficult for the yen to gain substantial momentum in the near term, serving as a primary support for the dollar-yen pair at elevated levels.

**Technical picture shows further upside potential**

From a technical analysis perspective, the weekly chart displays a clear long-term uptrend, with the price action previously formed in the 155.37 to 160.47 range viewed by some analysts as a bullish signal, suggesting buyers remain in control. However, signals on the daily chart appear more complex. Some trading views suggest that while the sharp volatility triggered by earlier policy intervention has dominated short-term sentiment, it has not yet broken the overall bullish market structure, with the current setup more resembling a challenged trend rather than a fully reversed one.

**Key data to guide short-term direction**

In the near term, the pair is testing the critical and sensitive 160.00 level. This level is not only a major psychological round number but has also been widely regarded by the market as a potential "red line" that could trigger intervention by Japanese authorities. Some market institutions expect that, absent a catalyst that materially changes the US-Japan rate differential, the dollar-yen pair may remain range-bound between 155 and 160. The upcoming economic data and policy signals from the Federal Reserve at Jackson Hole are expected to be key variables in determining whether the pair can effectively break and hold above this level. As of the European session on Tuesday, the market is closely monitoring these events for a clear directional breakout.