USD/JPY Volatile as US-Iran War Lifts Oil, Yen Carry Unwind Looms

USD/JPY faces heightened two-way risk as the US-Iran military conflict drives crude oil prices sharply higher while simultaneously raising the specter of a significant yen carry trade unwind. The pair is caught between opposing forces: rising US yields and dollar strength from safe-haven flows support the upside, while institutional deleveraging and risk-off yen demand threaten a swift downside reversal reminiscent of the August 2024 carry unwind episode. WTI crude futures have surged on supply disruption fears through the Strait of Hormuz, a chokepoint for roughly one-fifth of global oil shipments. The Bank of Japan's policy stance becomes increasingly relevant as higher energy import costs could accelerate Japanese inflation, potentially prompting a more hawkish tilt. Key technical levels include resistance near recent highs, with significant stop-loss clusters below that could accelerate a move lower if carry positions are liquidated. Traders should exercise caution with position sizing given the binary nature of geopolitical risk, and monitor cross-asset correlations between oil, yields, and yen pairs for early signals of a broader risk event.