The US dollar traded in a narrow range around 160.20 against the Japanese yen during Monday's Asian session. As the United States and Iran reached a framework for peace to end a military conflict that had lasted nearly four months, market risk appetite improved noticeably, leading to an adjustment in safe-haven fund flows. The overall retreat in the US Dollar Index provided some support for the yen.
The US and Iran have agreed on a framework to end hostilities, lift the maritime blockade on Iran, and restore navigation through the Strait of Hormuz. Concurrently, the UK, France, Germany, and Italy indicated they are prepared to lift some sanctions if Iran takes corresponding measures regarding its nuclear program. The easing of Middle East tensions has reduced market concerns about energy supply disruptions and further inflationary pressures, thereby diminishing the dollar's safe-haven appeal.
However, cautious sentiment in the market has not completely dissipated. US President Donald Trump stated that the US could resume military action if Iran fails to reach a final nuclear agreement with the United States. This suggests the current peace framework remains uncertain, and any setbacks in negotiations or renewed geopolitical tensions could reignite market demand for safe-haven assets.
Market analysts believe the dollar may continue a moderate adjustment over the next few trading sessions, while some risk-sensitive currencies, including the yen, could gain some support, though the likelihood of significant volatility in the short term remains low. Market focus this week will shift to the interest rate decisions from the US Federal Reserve and the Bank of Japan. It is widely anticipated that the Fed will keep rates unchanged at this meeting, continuing to observe the economic impact of previous energy price fluctuations and inflation changes. Investors will also closely watch the remarks from new Fed Chair Kevin Warsh regarding the future path of monetary policy for clues about potential future rate cuts or further tightening.
Simultaneously, the Bank of Japan is expected to raise its policy rate further on Tuesday, with the market largely pricing in this hike. The rate is forecast to rise to 1.0%, which would be its highest level since 1995. Market surveys suggest the BoJ may further increase the rate to 1.25% in the fourth quarter. If the Bank of Japan signals a more hawkish policy stance, the yen could receive additional support, potentially exerting downward pressure on the USD/JPY pair. Looking at the daily chart, USD/JPY has maintained a high-level consolidation after a strong breakout above the 160.00 psychological level, with the overall uptrend remaining intact. The area around 160 is currently a key battleground for bulls and bears. If the exchange rate can sustainably hold above this level, it could test resistance zones near 161.50 and 163.00. However, a break below the key support at 159.00 could trigger short-term profit-taking and lead to a further pullback towards the 157.50 area. From a 4-hour chart perspective, the short-term momentum for USD/JPY has slowed, forming a consolidation pattern above 160. Short-term moving averages are beginning to flatten, indicating some weakening in bullish momentum, though no clear reversal signal has emerged yet. If the BoJ delivers a more hawkish signal after the rate hike, the pair could correct towards the 159.00 area. Conversely, if the Fed maintains a firm stance, USD/JPY may still have an opportunity to challenge the 160.50 to 161.50 zone again.
The emergence of the US-Iran peace framework has reduced safe-haven demand for the dollar, weakening the short-term upward momentum for USD/JPY. However, as the Fed is likely to maintain relatively high interest rates for an extended period, and the Bank of Japan's policy remains relatively accommodative overall despite entering a rate-hike cycle, the interest rate differential between the US dollar and the Japanese yen remains a core factor influencing the exchange rate. The interest rate decisions from the two major central banks this week will be key in determining the next phase of movement for USD/JPY. Investors should focus on the Bank of Japan's policy guidance following its rate hike and the Federal Reserve's latest assessment of the future interest rate path.