USD/JPY steadies after hawkish BoJ shift as Middle East tensions support Dollar

• USD/JPY stabilizes after a more hawkish-than-expected Bank of Japan announcement.
• Middle East tensions and a stronger US Dollar limit downside in the pair.
• Markets remain focused on the Fed and the risks of energy-driven inflation.

USD/JPY trades around 159.50 on Tuesday, up modestly by 0.07% on the day, after briefly falling below the 159.00 level following the Bank of Japan’s (BoJ) policy decision. The pair quickly recovered most of its losses, supported by renewed demand for the US Dollar (USD) in a context of persistent geopolitical risks.

The Bank of Japan left its key interest rate unchanged at 0.75%, in line with expectations, but adopted a more hawkish stance than anticipated. The 6-3 split vote, with three members favoring a rate hike, along with an upward revision of inflation forecasts, strengthens expectations for monetary tightening as early as this summer. Governor Kazuo Ueda highlighted that real interest rates remain significantly low and warned about upside inflation risks, reinforcing a hawkish bias.

This more restrictive stance initially supported the Japanese Yen (JPY), also helped by intervention warnings from Japanese authorities in response to currency volatility. However, the Japanese Yen’s (JPY) gains remain limited by economic concerns linked to energy supply disruptions, particularly around the Strait of Hormuz, which weigh on an economy heavily dependent on energy imports.

At the same time, the US Dollar (USD) benefits from its safe-haven status amid an uncertain environment. Ongoing tensions between the United States (US) and Iran, as well as the lack of progress in diplomatic talks, maintain a risk-off mood. This backdrop supports the Greenback and allows USD/JPY to rebound despite the BoJ’s hawkish signals.

Meanwhile, US data indicated resilient consumer sentiment, with the Conference Board Consumer Confidence Index rising to 92.8 in April. This relative strength in the US economy, combined with expectations that the Federal Reserve (Fed) will keep interest rates unchanged within the 3.5%-3.75% range, continues to support US yields and, in turn, the US Dollar.

MUFG analysts believe the JPY’s rebound may prove temporary, noting that short positions on the Japanese currency are being rebuilt amid unfavorable external conditions. BNY economists highlight rising stagflation risks in Japan, while Danske Bank sees an increasing probability of a rate hike this summer. TD Securities also points out that the low-liquidity Golden Week period could heighten intervention risks if the pair continues to move higher.