USD/JPY bears may need to tread carefully.

The dollar remains supported by Middle East and Ukraine tensions and a resilient US economy, with Redbook retail sales up 10.2% y/y and September job openings rising to a stronger-than-expected 7.523 million in September.

The greenback may also be drawing support from funding-market dynamics, with SOFR volumes at their highest since June ahead of Wednesday's Treasury refunding announcement and Friday's payrolls report.

Against this backdrop, USD/JPY remains constructive, having regained its 21-DMA at 157.95 and the key 158.00 level, where more than $3 billion of options expire Friday. The pair has also broken above the 156.91-158.44 Ichimoku cloud, shifting focus to resistance at the 200-DMA near 158.60, the upper Bollinger around 158.90, the Sept. 24 high at 159.03 and 100-DMA at 159.18. A move through those levels could spur short covering.

However, options markets still favor yen calls, suggesting upside momentum may remain limited as investors stay wary of potential Japanese intervention, additional BOJ tightening and renewed equity-market volatility. With the VIX holding above 21% despite S&P 500 gains on Tuesday, risk sentiment remains fragile ahead of US midterm election results and the close of earnings season.

For USD/JPY bears to regain control, the pair would need to fall back below its 21-DMA and decisively break under the cloud base near 156.90.
Yen

(Robert Fullem is a Reuters market analyst. The views expressed are his own.)