USD/JPY extended gains for a sixth day, trading near 158.90 during European hours on Monday. The move was linked to Japanese energy importers selling large amounts of JPY to buy USD for higher-priced energy purchases.
Oil prices trimmed earlier gains after reports that Iranian and Omani technical teams met in Oman last week. The talks focused on a mechanism for safe transit through the Strait of Hormuz.
Oil Prices And Boj Expectations
Higher oil prices increased inflation concerns and supported expectations of a near-term Bank of Japan rate rise, which may limit further JPY weakness. Last week, BoJ board member Kazuyuki Masu called for a swift interest rate increase due to persistent inflation risks linked to the ongoing war.
Japan’s Chief Cabinet Secretary Seiji Kihara said the government is monitoring market moves, including long-term interest rates, with a very high sense of urgency. He did not comment on whether Japan might intervene in foreign exchange markets.
USD/JPY gains may be capped as the US dollar faced selling on lower safe-haven demand. Iran’s foreign ministry said indirect channels with the United States remain in place, despite heightened tensions and a difficult diplomatic environment.
With Brent crude holding above $95 a barrel for the past month, the continuous demand for US Dollars from Japanese energy importers will likely provide a strong floor for USD/JPY. This fundamental pressure is a key reason for the pair’s recent strength. We see this trend continuing as long as energy prices remain elevated.
Policy Intervention Risk
However, this situation creates a dilemma for the Bank of Japan, as Japan’s latest core Consumer Price Index for April came in at 2.9%, marking the fourth straight month above the central bank’s target. This persistent inflation is fueling market bets that the BoJ will be forced to raise interest rates at its next meeting. A rate hike would quickly strengthen the yen and push the pair lower.
The current level around 159.00 is entering a zone that has triggered sharp reactions from officials in the past, as we saw with the Ministry of Finance’s significant interventions back in 2024. The government’s heightened sense of urgency suggests that the risk of direct market intervention to buy yen is extremely high. Traders should therefore be cautious about holding long positions at these levels.
Adding to the complexity is a softening US dollar, which has been losing ground after last week’s disappointing US Retail Sales report pointed to a cooling American economy. This, combined with easing geopolitical tensions in the Middle East, is reducing the dollar’s appeal as a safe haven. This factor could cap any further significant upside for the pair.
Given these conflicting forces, we have seen one-month implied volatility on USD/JPY options jump to over 12%, reflecting deep market uncertainty. This environment makes buying simple call or put options expensive. Traders might instead consider strategies like straddles or strangles to profit from a large price swing in either direction, which could be sparked by intervention or a surprise central bank move.
