- USD/JPY regains positive traction following the overnight fall to a nearly three-week low.
- The fragile US-Iran ceasefire helps revive the USD demand and lend support to spot prices.
- Economic concerns stemming from Middle East conflicts weigh on the JPY and favor bulls.
The USD/JPY pair builds on the previous day’s modest bounce from sub-158.00 levels, or a nearly three-week low, and gains some positive traction during the Asian session on Thursday. Spot prices climb back closer to the 159.00 mark in the last hour and draw support from a combination of factors.
Investors turned skeptical about the durability of a fragile US-Iran ceasefire after Israel launched its largest assault on Lebanon. Adding to this, Iran reportedly is considering the possibility of withdrawing from the ceasefire agreement following what it said was an Israeli ceasefire violation in Lebanon. This keeps a lid on the optimism and benefits the US Dollar’s (USD) global reserve currency status, which, in turn, acts as a tailwind for the USD/JPY pair.
Meanwhile, Iran’s Islamic Revolutionary Guard Corps (IRGC) claimed that shipping through the critical Strait of Hormuz was halted minutes after Israel’s large-scale attack on Lebanon. Given Japan’s dependence on oil imports from the Middle East, the latest developments revive concerns that the economy will come under substantial strain in the foreseeable future. This further undermines the Japanese Yen (JPY) and lends additional support to the USD/JPY pair.
The USD bulls, however, seem hesitant on the back of the US Federal Reserve’s (Fed) dovish outlook. In fact, Minutes of the March FOMC meeting released on Wednesday showed that the central bank still sees interest rate cuts in the future if inflation were to decline in line with expectations. This, in turn, could limit any further appreciation for the USD/JPY pair as traders now look forward to the crucial US inflation data for some meaningful impetus.
The US Personal Consumption Expenditures (PCE) Price Index is due later during the North American session. The focus will then shift to the US Consumer Price Index (CPI) report on Friday, which will play a key role in influencing market expectations about the Fed’s policy outlook and drive the USD demand. Apart from this, geopolitical headlines should contribute to infusing volatility in the global financial markets and around the USD/JPY pair.
