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- USD/JPY struggles to gain any meaningful traction amid mixed fundamental cues.
- Intervention risks hold back the JPY bears from placing fresh bets and cap spot prices.
- The wide US-Japan rate gap and rising US-Iran tensions act as a tailwind for the pair.
The USD/JPY pair seesaws between tepid gains/minor losses during the Asian session on Monday and currently trades just below mid-162.00s amid relatively thin liquidity on the back of a holiday in Japan. Nevertheless, spot prices remain close to a four-decade high, touched earlier this July, though bulls seem hesitant amid speculations that Japanese authorities will step in to prop up the Japanese Yen (JPY).
Japan’s Finance Minister Satsuki Katayama said on Friday that the government will take decisive action at any time if it becomes necessary. Despite the warning of possible intervention in the currency market, the JPY continues with its struggle to attract any meaningful buyers amid the wide rate differential between Japan and other major economies, which keeps the so-called carry trade active. Apart from this, economic risks stemming from the Middle East crisis continue to undermine the JPY, which, along with a modest US Dollar (USD) strength, acts as a tailwind for the USD/JPY pair.
Given that Japan relies on the Middle East for over 90% of its crude oil, investors are increasingly worried that the economy will remain under strain due to escalating US-Iran tensions and supply disruptions in the Strait of Hormuz. In fact, the US military said that it carried out a ninth straight night of strikes against Iran aimed at degrading its capabilities used to attack commercial vessels and civilian mariners transiting the strategic waterway. Moreover, US allies in the region reported a new wave of attacks on Sunday, prompting traders to continue to price in the geopolitical risk premium.
Meanwhile, US-Iran hostilities benefit the safe-haven USD amid concerns that rising crude oil prices would revive inflationary pressures and force the US Federal Reserve (Fed) to adopt a more hawkish stance. According to the CME Group’s FedWatch Tool, traders are still pricing in the possibility of at least one interest rate hike by the Fed in 2026. This, in turn, favors the USD bulls and backs the case for a further near-term appreciating move for the USD/JPY pair. Hence, any corrective pullback could be seen as a buying opportunity and is more likely to be limited.
