USD/JPY experiences robust follow-through positive momentum for the second consecutive day on Monday. The substantial rate differential between the US and Japan exerts downward pressure on the JPY, whereas the risks associated with Hormuz appear to favour the USD. Intervention risks may deter JPY bears from initiating new positions and limit spot price movements. The USD/JPY pair continues to strengthen its recovery from the 160.50-160.45 region, which represents a two-week low reached on Friday, and is experiencing robust follow-through momentum for the second consecutive day on Monday. The robust intraday ascent propels spot prices nearer to the 162.00 threshold during the Asian session, maintaining traders’ heightened vigilance in light of potential intervention by Japanese authorities.
Japan’s Finance Minister Satsuki Katayama stated on Friday that officials are prepared to respond appropriately to currency fluctuations. Moreover, Japan’s Chief Cabinet Secretary Minoru Kihara reiterated that the administration is closely monitoring foreign exchange movements and is prepared to intervene when necessary. This might deter traders from making aggressive bearish bets on the Japanese Yen and serve as a headwind for the USD/JPY pair. However, a persistently wide interest rate differential between Japan and the US continues to fuel the so-called carry trade and exert significant pressure on the JPY. The Bank of Japan raised its policy rate to 1.00% in June, marking the highest level since 1995, whereas the US Federal Reserve kept its interest rate target range steady at 3.5% to 3.75%.
This, along with economic risks stemming from tensions in the Middle East, undermines the JPY and supports the USD/JPY pair. Tensions surrounding the waterway remain elevated as Iran aims to assert greater control. Iran’s ambassador to China stated on Saturday that Tehran intends to implement new service fees for vessels transiting the strategically significant waterway, despite the US’s dismissal of the notion of Iran imposing charges on ships utilising the strait. Nevertheless, the standoff revives demand for the safe-haven US Dollar and further acts as a tailwind for the USD/JPY pair.
Meanwhile, any significant appreciation of the USD appears to be out of reach following the diminishing expectations for rate hikes by the US Federal Reserve, particularly in light of the recent soft US Nonfarm Payrolls report released last Thursday. Furthermore, the alleviation of inflation concerns amid the recent decline in crude oil prices may enable the US central bank to take a more measured approach, potentially limiting the strength of the USD. This situation calls for prudence before making new bullish investments in the USD/JPY pair.