• USD/JPY catches fresh bids on Monday and draws support from a combination of factors.
• The wide rate gap and economic concerns due to the Middle East crisis undermine the JPY.
• The US-Iran standoff and Fed hike bets support the USD, contributing to the pair’s move up.

The USD/JPY pair sticks to its modest intraday gains through the early European session on Monday and currently trades above the 162.00 mark, up 0.30% for the day. Moreover, spot prices remain well within striking distance of a four-decade high, touched early this month, and seem poised to appreciate further amid a supportive fundamental backdrop.

The Japanese Yen (JPY) continues with its relative underperformance as the wide rate differential between Japan and other major economies, including the US, keeps the so-called carry trade active. Adding to this, concerns that Japan’s economy will remain under strain from Strait of Hormuz risks, as the nation relies on the Middle East for over 90% of its crude oil, exert additional pressure on the JPY. This, along with a modest US Dollar (USD) strength, turns out to be another factor acting as a tailwind for the USD/JPY pair.

The geopolitical risk premium is back in play amid a further escalation of tensions between the US and Iran, which, in turn, helps the safe-haven USD to build on Friday's goodish rebound from over a one-week low. In fact, the US unleashed a major round of strikes on Iran over the weekend, while Iran responded with missile attacks on US military bases in the Gulf. Moreover, Iran’s Islamic Revolutionary Guard Corps (IRGC) fired at another commercial vessel in the Strait of Hormuz and announced the closure of the critical waterway.

This, in turn, triggers a fresh leg up in Crude Oil prices, which revive concerns about energy-driven inflationary pressures and reaffirm market bets that the US Federal Reserve (Fed) will hike interest rates at least once in 2026. Meanwhile, Japan's Chief Cabinet Secretary, Minoru Kihara, said that the Government Pension Investment Fund (GPIF) has the mandate to tweak its basic portfolio as need be, raising hopes for more investment in domestic ‌assets. This, however, fails to impress the JPY bulls or cap the upside for the USD/JPY pair.

That said, looming intervention risks could help limit deeper JPY losses. The USD bulls also seem reluctant and opt to wait for more cues about the US central bank's policy path before placing fresh bets. Hence, the focus will remain glued to Fed Chair Kevin Warsh's congressional testimony later this week. Apart from this, the crucial US inflation figures – the Consumer Price Index and the Producer Price Index (PPI) due on Tuesday and Wednesday, should provide some meaningful impetus to the Greenback and the USD/JPY pair.