Japan stood ready for another round of intervention in the Forex market, but rumors of a peaceful resolution to the conflict between the US and Iran caused the USD/JPY pair to retreat without any currency interventions. Such interventions may not be necessary at all. Let’s analyze the situation and make a trading plan.
The article covers the following subjects:
Major Takeaways
- Japan has refrained from further intervention.
- The easing of geopolitical risks is supporting the yen.
- Rumors of a Fed rate cut are weighing on the dollar.
- Short trades can be opened if the USD/JPY pair slides below 159.
Weekly Fundamental Forecast for Yen
There were no interventions, nor were any needed. In the run-up to the holiday season, rumors circulated across the Forex market—from New York to London—that Japan might take advantage of thin liquidity to intervene in the currency market once again. At the turn of April and May, it had already spent around ¥10 trillion on such efforts. However, this time there was no need to burn through reserves. The USD/JPY pair opened the week with a gap down.
USD/JPY Rate and Japanese FX Interventions
Source: Bloomberg.
Before Donald Trump’s announcement that the agreement with Iran was in its final stages of negotiation, fundamental factors were not in favor of the yen. High energy prices due to the conflict in the Middle East hurt Japan’s economy, while the US benefited from record-high oil and natural gas exports.
The potential acceleration of US inflation led futures markets to price in a possible hike in the federal funds rate. In contrast, the Bank of Japan had reason to slow its monetary tightening cycle, as consumer price growth eased to 1.4% in April, the lowest level in four years.
Japan CPI
Source: Bloomberg.
As a result, the interest rate differential between central banks, along with wide yield spreads between US and Japanese bonds, is providing a tailwind for USD/JPY quotes. Adding to this, Tokyo’s intention to pass a supplementary budget of around ¥3 trillion to shield the economy from the negative impact of the conflict in the Middle East further reinforced pressure on the yen.
In practice, the mismatch between the Bank of Japan’s gradual monetary tightening and the government’s fiscal stimulus contributed to bond sell-offs and weighed on the Japanese currency.
A peaceful resolution to the conflict in the Middle East changes everything. The market narrative will likely shift, and investors will view high inflation as a transient issue, expecting it to decline after peaking and abandoning their expectations of a rise in the federal funds rate. In the future, the likelihood of a rate cut may increase rapidly, weakening the US dollar. Tokyo will not need to intervene in the Forex market to temper USD/JPY bulls.
Nevertheless, traders should keep in mind the dual outcomes. Donald Trump has repeatedly said that the conflict in the Middle East is coming to an end. However, when it came to finalizing the agreement between the US and Iran, everything fell apart.
Weekly USDJPY Trading Plan
If history repeats itself, the USD/JPY pair could potentially rise above 160. The Bank of Japan views the 159 level as critical. If bulls fail to push the price back above it, profit-taking on long positions opened around 156.5 may follow. This could then lead to a shift toward selling the US dollar against the yen. If that scenario does not materialize, the bias should remain tilted toward long positions.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of USDJPY in real time mode
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