Japanese Yen trades cautiously as intervention risk clashes with Fed rate hike bets

• USD/JPY trades flat as intervention risks offset support from the wide US-Japan yield gap.
• The Japanese Yen finds support after Atsushi Mimura renews warnings over excessive currency weakness.
• US-Iran diplomacy and upcoming US economic data remain in focus as markets price another possible Fed rate hike in October.

USD/JPY trades little changed around 157.25 on Monday as the US Dollar (USD) also holds steady near recent highs, with traders weighing Middle East developments and the risk of Japanese intervention.

The Japanese Yen (JPY) strengthened earlier in the day after Japan’s top currency diplomat, Atsushi Mimura, renewed warnings about the currency’s weakness. Mimura said markets should take “at face value” the “very clear message” sent by Japan and the United States. He said he was neither satisfied nor reassured by the Yen’s recent moves, but declined to comment on whether Tokyo would intervene again. Mimura also said he had no concerns about Japan’s ability to fund further action in the currency market.

Mimura’s remarks suggest that Japanese officials remain prepared to intervene after earlier episodes in April and July. Traders are likely to stay cautious as USD/JPY moves closer to the 160 level.

On the US-Iran front, a US official told Al Jazeera that Washington continues to hold “positive discussions” with Iran through intermediaries, but said any agreement must address the nuclear issue. CNN reported that President Donald Trump is open to easing sanctions in exchange for “concrete progress” on nuclear matters.

Al Hadath reported on Monday, citing sources, that Iran had agreed to suspend uranium enrichment in return for sanctions relief from the United States. The report has not been independently confirmed. Progress in negotiations could ease concerns about Oil prices and inflation. Until then, markets continue to assess energy-driven inflation risks, keeping bond yields elevated across major economies as traders weigh the prospect of further tightening by global central banks.

The 10-year US Treasury yield has climbed to 5.27%, its highest level since 2007, while Japan’s 10-year government bond yield has risen toward 3.1%, its highest level since 1996. The wide yield gap and expectations of further Federal Reserve (Fed) rate hikes continue to favour the US Dollar, even as the Bank of Japan (BoJ) remains on a gradual tightening path.

The CME Fedwatch Tool shows that markets are pricing in about a 70% chance of another rate increase in October, following the central bank’s 25-basis-point (bps) hike at its September 15-16 meeting. Traders now await this week’s US economic data, including the Personal Consumption Expenditures (PCE) inflation report on Wednesday, the ISM Manufacturing Purchasing Managers’ Index (PMI) on Thursday and Nonfarm Payrolls (NFP) on Friday.