For the third day, USD/JPY has been under pressure amid hopes for de-escalation in the Middle East, which are weighing on the US dollar. Market participants continue to assess the likelihood of a US withdrawal from the confrontation with Iran and await new geopolitical signals to form a more pronounced impulse.

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On Tuesday, President Donald Trump said that the United States intends to significantly scale back current military actions against Iran within the next two to three weeks, and, in his words, Tehran does not need to sign an agreement with Washington for the conflict to end. These remarks increased expectations of a rapid de-escalation in the Middle East and helped improve global risk appetite, which in turn weakens the US dollar and limits upside in USD/JPY.

Additional support for the Japanese yen comes from a Bank of Japan survey showing improved business sentiment among large manufacturers for the quarter ending in March. The key index measuring sector confidence rose to 17, marking the fourth consecutive quarterly increase and reaching the highest level since December 2021. Nevertheless, a BOJ representative noted that the survey results likely do not fully reflect the effects of the Middle East conflict.

At the same time, reports that the United Arab Emirates advocate for military intervention to restore navigation through the Strait of Hormuz raise the risk of a wider regional escalation. Given Japan's high dependence on oil imports from Middle Eastern countries, a continued standoff with Iran heightens concerns about near-term economic pressure on Japan. Such expectations can weigh on the yen, although assumptions about possible interventions by Japanese authorities may limit the extent of its weakening.

Overall, the ambiguous fundamental backdrop calls for caution when opening directional positions on USD/JPY. To obtain the best trading opportunities, focus should be on the release of key US macro data at the start of the new month, including the ADP private payrolls report and the ISM manufacturing activity index.

From a technical perspective, the pair has moved below the 20-day SMA, indicating that bulls are losing strength; nevertheless, it has held above 158.25 and above the level of 158.00. If prices fail to hold above these levels, the decline should accelerate toward 157.50. However, as long as the 20-day SMA remains relevant, the upside target is 159.70. And while oscillators remain positive, the bulls are not ready to surrender completely.