Donald Trump’s statement that the conflict with Iran will end soon has forced USD/JPY bulls to retreat. Meanwhile, bears may be overly optimistic because the word “soon” can be interpreted in many ways. Let’s discuss this topic and make a trading plan.
The article covers the following subjects:
Major Takeaways
- Japan depends on oil supplies from the Middle East.
- Surging oil prices lead to stagflation.
- The Bank of Japan is adopting a cautious approach to raising interest rates.
- Long trades on the USD/JPY pair can be opened if the price breaks through 157.65 and 158.35.
Weekly Fundamental Forecast for Yen
As soon as Donald Trump started talking about ending the armed conflict in the Middle East, the “sell Asia, buy America” trade reversed. The USD/JPY pair fell below the level at which the Japanese authorities could have intervened in the Forex market, allowing the government to take a breather. However, have investors mistook their wishful thinking for reality?
Japan relies on the Middle East for 90–95% of its crude oil imports. Therefore, the closure of the Strait of Hormuz and the associated spike in Brent to $120 per barrel fueled the rally in USD/JPY quotes. If prices had remained at that level, GDP growth would have slowed by 0.47 percentage points, and inflation would have accelerated by 0.83 percentage points, according to Nomura Research Institute.
USD/JPY Rate and Oil Price
Source: Bloomberg.
Investors seemed to overreact to Donald Trump’s remarks that the US was succeeding in confronting Iran and that the conflict would soon end. The president made the remark because rising oil and gasoline prices are undermining his approval ratings and could lead to a Republican defeat in the midterm elections. As always, market emotions often overpower rational thinking.
At the same time, Tehran has no plans to surrender or negotiate with Washington. Bulls may soon stage another rally in Brent prices, and the consolidation of oil prices near $100 per barrel will be extremely painful for the Japanese economy. Coupled with a weak yen and union demands for wage increases of 5.95–6.1%, mounting geopolitical risks may further spur inflation.
Japan may face a stagflationary scenario similar to the crises experienced in the 1970s. Previously, the country struggled with deflation and low GDP growth. Now it faces another problem. Prime Minister Sakae Takaichi may need to deploy additional fiscal stimulus, and the Bank of Japan may have to delay raising the overnight rate.
Fed Funds Rate and BoJ Policy Rate
Source: Bloomberg.
Meanwhile, Bloomberg analysts are divided on the timing of the next monetary policy tightening. Some lean toward April, while others point to June. At the same time, the futures market sees a 60% chance of a rate hike in April.
However, the yen will unlikely gain much from this. As long as the Fed keeps the federal funds rate high, carry traders can use the yen as a funding currency. As a result, the yen may resume its downward trend against the US dollar.
Weekly USDJPY Trading Plan
The market seems to be overly optimistic about the imminent end of the Middle East conflict. Once emotions give way to rational thinking, the pullback in USD/JPY quotes will likely finish. Against this backdrop, long trades can be considered if the pair settles above 157.65 or pierces 158.35.
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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