USD/JPY held steady on Monday as traders monitored rapidly evolving news from the Middle East. Ongoing worries about possible interventions from Japanese authorities are also curbing any significant upward movement as the Japanese yen (JPY) approaches the 160.00 mark against the US dollar (USD).
As it stands, the currency pair was trading around 160.15, with little change throughout the day.
According to Iran’s Fars News Agency, Iran has concluded its military actions against Israel after weekend attacks marked the first escalation since a ceasefire was announced in April.
In the meantime, US President Donald Trump attempted to reassure the markets by stating that peace discussions between the US and Iran are still active, and emphasized that the blockade on Iranian ports would remain until a comprehensive agreement is in place.
This news led to a slight weakening of the US dollar, and the Japanese yen saw a bit of a rebound partly due to improved risk sentiment. The U.S. Dollar Index (DXY), which measures the dollar’s value against six major currencies, was around 99.96 after briefly peaking at 100.21, its highest since early April.
However, the underlying situation for the yen remains fragile, suggesting that the downside potential for the dollar/yen pairing may be constrained.
Why is the yen weak?
The Japanese yen has negated all gains made after the government intervened in late April when the currency surpassed the 160.00 threshold. Reports indicate that Japan’s Ministry of Finance provided unprecedented support totaling 11.735 trillion yen between April 28 and May 27.
The conflict between the US and Iran has bolstered demand for the US dollar, while putting additional strain on energy-importing nations like Japan. With over 90% of Japan’s crude oil coming from the Middle East, the yen is quite vulnerable to fluctuating oil prices and potential supply issues.
The US dollar retains an edge due to significant interest rate disparities between Japan and the US. Moreover, the recent uptrend in oil prices has raised inflation risks and heightened expectations that the Federal Reserve may need to increase interest rates again.
Given the slow pace of normalization by the Bank of Japan (BOJ), such an adjustment could further broaden the interest rate gap.
What lies ahead?
Traders are preparing for US inflation data set to be released later this week, ahead of a central bank decision next week. The market has already factored in a rate hike from the Bank of Japan, while the Fed is expected to keep rates stable.
Beyond the actual decision, market participants will be looking for indications about the future policy stances of both central banks. Any signals suggesting that the Fed might maintain elevated interest rates for an extended period, or that the Bank of Japan is hesitant to tighten further, could guide the next movements in USD/JPY.
