USD/JPY trades with a slightly softer tone on Monday as the Japanese Yen (JPY) finds modest support amid a broadly weaker US Dollar (USD), 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 at 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.
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it.
Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
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