• USD/JPY edges lower as the US Dollar weakens on improving sentiment around US-Iran ceasefire talks.
• Japanese Yen finds modest support, while intervention risks build near the 160.00 level.
• Oil-driven inflation concerns keep BoJ tightening bets intact, while Fed rate-cut expectations fade.

USD/JPY trades with a slightly softer tone on Monday as the Japanese Yen (JPY) finds modest support as the US Dollar (USD) weakens broadly, with traders assessing fresh geopolitical developments, including reports of potential ceasefire talks between the United States and Iran.

At the time of writing, USD/JPY is little changed around 159.45. Meanwhile, the US Dollar Index (DXY), which tracks the Greenback’s value against a basket of six major currencies, is trading around 99.84, down nearly 0.34% on the day.

Optimism over a potential de-escalation in the US-Iran war is building, with reports pointing to ongoing diplomatic efforts. According to Axios, the US and Iran, along with regional mediators, are discussing a possible 45-day ceasefire that could help end the war.

Separately, Reuters reported that both Washington and Tehran have received a proposal for a two-step deal to end hostilities, which could take effect as early as Monday and may include reopening the Strait of Hormuz.

While the situation remains uncertain, Iran’s Foreign Ministry spokesperson, Esmaeil Baghaei, said Tehran has formulated its diplomatic response to the US and will announce it in due time, according to SNN.

Unless a clear resolution is reached, Oil prices, inflation risks and growth concerns are likely to remain front and center, shaping the monetary policy outlook across major economies.

In Japan, rising Oil prices may reinforce inflation and keep the Bank of Japan (BoJ) on a gradual tightening path. However, as a net energy importer, higher energy costs could also weigh on economic growth and limit the pace of further rate hikes. Markets are currently pricing in around a 70% chance of a rate hike at the April meeting, with expectations for two hikes by year-end.

Meanwhile, intervention risks remain elevated as USD/JPY trades close to the 160.00 level, with Japanese authorities having repeatedly signaled their readiness to act against excessive currency volatility.

In the United States, market expectations have shifted sharply since the start of the US-Iran war. Investors now expect the Federal Reserve (Fed) to keep interest rates on hold through 2026, a notable shift from earlier expectations of at least two rate cuts this year.

On the data front, the ISM Services Purchasing Managers Index (PMI) for March came in at 54, down from 56.1 in February and below expectations of 55.