USD/JPY Consolidates, Risk of Japanese Intervention Limits Gains
USD/JPY consolidated on Monday (May 25) after opening the week with a gap down, as the US dollar was pressured by growing optimism that the US and Iran were moving closer to a deal that could lead to the reopening of the Strait of Hormuz. At the time of writing, the pair was trading around 158.90 and remained within its range over the past week.
Hopes for de-escalation emerged after weekend reports indicated that Washington and Tehran were making progress toward an interim framework agreement to end the war. The package under discussion reportedly included a 60-day extension of the ceasefire, the opening of the Strait of Hormuz, and the lifting of the US naval blockade of Iranian ports, while negotiations on Iran's nuclear program continued.
These developments pressured energy prices and contributed to a weakening dollar, with WTI falling to its lowest level since May 7 and the dollar index (DXY) retreating near 99.00. Fundamentally, weaker oil prices typically reduce inflationary pressures and reduce defensive support for the dollar, although the market is still awaiting certainty regarding the details and implementation of the agreement.
However, the yen's strengthening was not seen as dominant despite the softer dollar. Energy prices are said to remain well above pre-conflict levels, maintaining pressure on Japan's economy, which relies on energy imports. Even if the Strait of Hormuz fully reopens, normalization of shipping flows and supply chains is expected to take time, leaving the yen vulnerable in the near term to high energy costs.
Domestically, Japanese Prime Minister Sanae Takaichi stated that the government will prepare support measures to cushion the burden on household electricity and gas bills from July to September. Japan will also prepare a supplementary budget of over ¥3 trillion, with approximately ¥500 billion allocated specifically for electricity and gas subsidies.
On the upside, USD/JPY's upside room is also considered limited as the market is wary of potential intervention by Japanese authorities around the 160.00 level, given the sharp yen strengthening episode in late April when the exchange rate briefly breached that area. However, the broader upward bias remains supported by the US-Japan interest rate differential: concerns about energy-fueled inflation are seen as maintaining expectations that the Fed will remain patient in cutting interest rates, while the Bank of Japan is expected to continue its gradual policy normalization. (Arl)
Source: Newsmaker.id
