• USD/JPY attracts some follow-through buying amid a combination of supporting factors.
• The wide US-Japan rate gap keeps the JPY carry trade in play and acts as a tailwind.
• The Iran uncertainty and Fed hike bets underpin the USD, contributing to the move higher.

The USD/JPY pair sticks to a bullish bias for the second consecutive day and trades around the 162.30 region during the first half of the European session, near a four-decade high touched earlier this Tuesday.

The Japanese Yen (JPY) continues with its relative underperformance in the wake of a wide interest rate differential between Japan and other major economies, including the US. In fact, the Bank of Japan (BoJ) raised policy rates to 1% – the highest since 1995 – in June, while the US Federal Reserve (Fed) maintained its interest rate target range of 3.5% to 3.75%. This gap of around 250 basis points (bps) keeps the so-called JPY carry trade in play and continues to act as a tailwind for the USD/JPY pair.

The US Dollar (USD), on the other hand, attracts fresh buyers and stalls a three-day-old retracement slide from its highest level since May 2025. Renewed US-Iran hostilities fuel inflationary fears and bolster bets for US Federal Reserve (Fed) rate increases. According to the CME Group's FedWatch Tool, traders are currently assigning an 80% probability of a move by the end of this year, which, in turn, offers some support to the USD and further contributes to the bid tone around the USD/JPY pair.

The aforementioned factors, to a larger extent, counters market speculations that Japanese authorities will step in again to prop up the domestic currency. In fact, Japan’s Chief Cabinet Secretary Minoru Kihara reiterated during a regularly scheduled press conference earlier today that he is always ready to take necessary action on forex. Furthermore, Japan’s Finance Minister Satsuki Katayama said that her government will respond appropriately to currency moves at any time as needed.

Meanwhile, the BoJ's hawkish tilt fails to impress the JPY bulls, suggesting that the path of least resistance for the USD/JPY pair remains to the upside. The Summary of Opinions from the BoJ's June meeting showed last week that members debated mounting inflation risks, with some calling for faster rate hikes to near levels deemed neutral to the economy. Moreover, signs that inflation in Japan was picking up endorse the BoJ’s tightening stance, though it does little to provide any respite to the JPY.

Traders now look forward to Tuesday's US economic docket, featuring the Conference Board's Consumer Confidence Index and JOLTS Job Openings data. The focus, however, will be on Fed Chair Kevin Warsh's appearance on Thursday at the European Central Bank (ECB) Forum in Sintra. Apart from this, the popularly known Nonfarm Payrolls (NFP) report will offer cues about the Fed's policy path, which, in turn, will drive the USD and provide a fresh impetus to the USD/JPY pair.