USD/JPY dips as Dollar eases, Oil strength limits Yen gains

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USD/JPY trades with a downside bias on Monday as the US Dollar (USD) gives up earlier gains amid hopes of a possible deal to end the US-Iran war, despite escalating tensions.

USD/JPY holds within a one-month range as elevated Oil prices offset Dollar weakness.
Geopolitical tensions in the Middle East continue to drive market sentiment, keeping traders on edge.
Markets focus squarely on US-Iran developments, with the current two-week ceasefire set to expire on Wednesday.

USD/JPY trades with a downside bias on Monday as the US Dollar (USD) gives up earlier gains amid hopes of a possible deal to end the US-Iran war, despite escalating tensions. However, the pair lacks strong follow-through selling, as elevated Oil prices continue to weigh on the Japanese Yen (JPY), keeping price action confined within a one-month range.

At the time of writing, USD/JPY is trading around 158.75, easing from an intraday high of 159.20. Meanwhile, the US Dollar Index (DXY), which tracks the Greenback's value against a basket of six major currencies, is trading near 98.00 after opening the week with a bullish gap and touching a high of 98.49.

Over the weekend, Iran once again closed the Strait of Hormuz, citing ceasefire violations linked to the ongoing US naval blockade. Meanwhile, the US Navy intercepted and boarded an Iranian cargo vessel in the Gulf of Oman. Tehran condemned the move as “armed piracy” and has threatened retaliation, while also signaling it would not attend further negotiations unless the US lifts the blockade.

In reaction, crude prices edged higher after last week’s sharp decline, with West Texas Intermediate (WTI) trading around $87.35 at the time of writing, up over 4% on the day. Japan is sensitive to rising energy costs, given its status as a net energy importer.

Despite the heightened uncertainty, investors remain cautiously optimistic that a second round of peace talks, reportedly led by Pakistan, is expected to take place on Tuesday, ahead of the current two-week truce set to expire on Wednesday.

However, US President Donald Trump said on Monday it is “highly unlikely” he will extend the ceasefire with Iran and added that the Strait of Hormuz will not be reopened until a deal is signed.

Beyond geopolitical developments, rising Oil prices are also stoking inflation concerns while posing risks to economic growth, complicating the monetary policy outlook for both the Federal Reserve (Fed) and the Bank of Japan (BoJ). With inflation still above the Fed’s 2% target, policymakers may adopt a wait-and-see approach, potentially delaying rate cuts.

In Japan, policymakers face a delicate trade-off. While inflation pressures support the case for gradual policy normalization, the potential drag on growth from higher import costs could slow the pace of tightening.

According to a Reuters report on Monday, citing five sources familiar with its thinking, the BoJ is likely to hold off on raising interest rates at its upcoming meeting, as fading prospects for a near-term resolution to the Middle East conflict continue to cloud the country’s economic and inflation outlook.

Looking ahead, attention remains on US-Iran developments, with traders watching for signs of progress toward a deal. On the data front, key releases this week include US Retail Sales and preliminary S&P Global Purchasing Managers Index (PMI) surveys, while Japan’s National Consumer Price Index (CPI) will also be in focus.

Inflation FAQs

What is inflation?

Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.

What is the Consumer Price Index (CPI)?

The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.

What is the impact of inflation on foreign exchange?

Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.

How does inflation influence the price of Gold?

Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.