USD/JPY gains on US-Iran friction, pares back as Trump extends ceasefire

FUNDAMENTAL OVERVIEW

USD:

The US dollar strengthened a bit yesterday as traders turned more cautious heading into the expected US-Iran talks in Islamabad and the ceasefire deadline. The markets got scared at some point as it looked like the Islamabad talks were dead on arrival with Iran refusing to participate until the US blockade in the Strait of Hormuz was lifted.

The sentiment improved though after Trump extended the ceasefire deadline (unsurprisingly) to allow more time for Tehran to put forward a proposal to end the war. There's no deadline for this latest extension, so we might just get stuck in this new situation until the bombs start dropping again or they finally reach a deal.

This morning, the sentiment is a bit more positive after Iran received 'some sign' the US is ready to break the blockade which is giving traders hope that the talks are going to happen soon.

The price action continues to be driven by US-Iran headlines, and this is unlikely to change until we get an official resolution. For now, the greenback will likely remain under pressure amid the optimistic expectations.

JPY:

On the JPY side, the currency has been mostly driven by US dollar strength and weakness as Japanese macro conditions continue to point towards a neutral policy. Yesterday, we got several reports suggesting the BoJ is going to keep interest rates unchanged at the upcoming meeting. This shouldn’t be a surprise at all given that inflation in Japan has been gradually easing with most metrics being near or below the 2% target.

Moreover, the US-Iran war hasn’t only put upward pressure on inflation but also downward pressure on growth. The end of the war would certainly be good news for the economy and should lift business sentiment which might eventually translate into favourable conditions for a rate hike, but for now we haven’t got an official resolution.

The BoJ will want to wait for the end of the war and let things settle before considering a rate hike. If the war ends and economic data picks up, they might lay the groundwork for a rate hike in June.

USDJPY TECHNICAL ANALYSIS – DAILY TIMEFRAME

On the daily chart, we can see that USDJPY continues to consolidate between the 158.00 support and the 160.00 handle. If the price pulls back into the support again, we can expect the buyers to step in with a defined risk below it to keep targeting the 162.00 level next. The sellers, on the other hand, will look for a break lower to open the door for a move into the major upward trendline around the 155.00 handle.

USDJPY TECHNICAL ANALYSIS – 4 HOUR TIMEFRAME

On the 4 hour chart, we have a downward trendline acting as resistance. The price probed above the trendline yesterday on some negative headlines but eventually fell back below it as Trump extended the ceasefire. The sellers are likely to pile in around these levels with a defined risk above the trendline to target the 158.00 support zone. The buyers, on the other hand, will want the price to break higher again to position for a rally into the 162.00 level next.

USDJPY TECHNICAL ANALYSIS – 1 HOUR TIMEFRAME

On the 1 hour chart, we have a minor upward trendline defining the pullback into the downward trendline. The buyers will likely continue to lean on it to keep pushing into new highs, while the sellers will look for a break lower to increase the bearish bets into the 158.00 support. The red lines define the average daily range for today.

UPCOMING CATALYSTS

Tomorrow we get the latest US Jobless Claims figures and the US PMIs. On Friday, we conclude the week with the Japanese CPI report. The focus remains on US-Iran headlines.