USD/JPY failed to extend a modest Asian-session rise on Tuesday and stayed below Monday’s peak, its highest level since 30 April. Even so, the pair held above the 160.00 psychological level, despite a softer US Dollar as Iran and Israel said they had halted attacks following an appeal from US President Donald Trump. That pulled the US Dollar Index (DXY) away from a two-month high and weighed on the pair, while speculation of fresh official support for the Japanese Yen (JPY) also capped gains.
Japan’s Finance Minister Satsuki Katayama restated that the authorities’ stance is unchanged and they are ready for decisive measures. However, demand for the JPY was restrained by concerns that Japan’s economy could stay under pressure from the Middle East conflict and continuing disruption to energy supplies via the Strait of Hormuz, tempering Bank of Japan (BoJ) rate-hike expectations. On the US side, expectations that the Federal Reserve (Fed) could raise borrowing costs by year-end, plus uncertainty over a US-Iran peace deal, helped limit further USD weakness, with markets waiting for US Consumer Price Index (CPI) data on Wednesday and Producer Price Index (PPI) figures on Thursday.
Market Balances and Risk of Japanese Intervention
We see the USD/JPY pair finding it difficult to gain more ground, holding just below the multi-year highs set yesterday. The pair remains above the critical 160.00 mark, even as the broader US Dollar shows some weakness. This suggests a tense balance in the market right now.
A major reason for this hesitation is the strong possibility of Japanese intervention to support the yen. We remember the authorities stepped in with over ¥9 trillion in April and May of 2024 when the rate first crossed 160. Recent verbal warnings from finance ministry officials suggest they are ready to act decisively again.
Central Bank Policy Divergence And The Outlook
Despite this, we believe the fundamental picture still supports a strong USD/JPY due to central bank policy differences. The Bank of Japan is moving very cautiously with rate hikes, while the Federal Reserve is holding rates higher for longer because of stubborn inflation, which recent data put at 2.7%. This significant interest rate gap continues to make the dollar more attractive than the yen.
Looking ahead, we think traders should hold off on making any big moves before this week’s US inflation data. The upcoming Consumer Price Index (CPI) report will be critical for shaping expectations of when the Fed might finally begin to cut rates. Until that data is released, it is risky to assume that the pair has peaked.
