- USD/JPY drops to a one-week low as the BoJ’s hawkish pause provides a goodish lift to the JPY.
- Economic concerns stemming from the Middle East conflict cap the JPY and limit losses for the pair.
- The US-Iran peace talks uncertainty benefit the safe-haven USD and further supports spot prices.
The USD/JPY pair attracts some intraday selling after the Bank of Japan (BoJ) announced its policy decision and touches a one-week low earlier this Tuesday. Spot prices, however, manage to recover a major part of the losses and trade around the 159.30 area, down less than 0.10% for the day during the early European session.
As was widely anticipated, the Japanese central bank kept its benchmark interest rate unchanged at 0.75% at the conclusion of a two-day meeting. However, the 6-3 vote split, with three BoJ board members calling for a rate hike, along with an upward revision of inflation forecasts, keeps a June or July rate hike firmly on the table. This comes on top of a fresh intervention warning from Japan’s Finance Minister Satsuki Katayama, saying that authorities were ready to take decisive action against speculative activity, lifting the Japanese Yen (JPY) and weighing on the USD/JPY pair.
In the post-meeting press conference, BoJ Governor Kazuo Ueda noted that real interest rates are at significantly low levels and acknowledged that the risk of inflation is significantly deviating upwards and exerting a negative impact on the economy. This, in turn, validates the hawkish outlook and remains supportive of the bid tone surrounding the JPY. However, economic concerns stemming from continued disruptions to energy supplies through the Strait of Hormuz cap JPY gains. This, along with a goodish pickup in the US Dollar (USD) demand, lends support to the USD/JPY pair.
Hopes for diplomatic efforts to end the Iran war receded after US President Donald Trump canceled his special envoy, Steve Witkoff, and Jared Kushner’s planned visit to Pakistan. Furthermore, Trump reportedly was dissatisfied with Iran’s new proposal on resolving the war, which would set aside discussion of Iran’s nuclear program. This, along with a standoff over the Strait of Hormuz, keeps geopolitical risks in play, which, in turn, is seen benefiting the USD’s reserve currency status, which, in turn, assists the USD/JPY pair to rebound around 35-40 pips from sub-159.00 levels.
