• USD/JPY strengthens at the start of the week as risk appetite deteriorates amid escalating tensions in the Middle East.
• Concerns about the economic impact of higher energy prices weigh on the Japanese Yen.
• Investors await the US ISM Manufacturing PMI and key labor market data later this week.

USD/JPY trades around 159.50 on Monday at the time of writing, up 0.13% on the day, as the US Dollar (USD) benefits from renewed safe-haven demand amid a worsening market sentiment backdrop.

The Greenback is supported by rising geopolitical tensions in the Middle East. Recent clashes between the United States (US) and Iran have revived concerns about the durability of the current ceasefire, while Israel has intensified its operations in Lebanon. This environment fuels risk aversion and boosts demand for the US Dollar.

At the same time, higher Oil prices are increasing concerns about Japan’s economic outlook. The country remains heavily dependent on energy imports, making its economy particularly vulnerable to supply disruptions through the Strait of Hormuz. These concerns continue to keep the Japanese Yen (JPY) near multi-week lows against the US Dollar.

Data released in Japan on Monday provided little support to the domestic currency. Corporate Capital Spending was flat in the first quarter after expanding by 6.5% YoY in the previous quarter, pointing to a slowdown in investment momentum.

On the monetary policy front, several Bank of Japan (BoJ) officials continue to support the case for a gradual normalization of policy. The Summary of Opinions from the April meeting showed that a majority of policymakers favor a rate hike in the near term while warning about persistent inflation risks. According to MUFG, markets are now pricing in roughly an 80% chance of a 25-basis-point rate increase at the June 16 meeting.

In the United States (US), attention is turning to a busy week of macroeconomic releases. The Institute for Supply Management (ISM) Manufacturing Purchasing Managers’ Index (PMI) is due later on Monday, ahead of a series of labor market reports throughout the week. Friday’s Nonfarm Payrolls (NFP) report will be the key event for investors and could provide fresh clues about the future path of the Federal Reserve’s (Fed) monetary policy.

The combination of a US Dollar supported by geopolitical risks and a Japanese Yen pressured by concerns over rising energy costs continues to favor a bullish bias for USD/JPY. However, fears of a potential intervention by Japanese authorities could limit further gains in the pair.