USD/JPY advances as surging Oil prices, tensions weigh on Japanese Yen

• The Japanese Yen remains under pressure despite renewed demand for safe-haven assets.
• Surging Oil prices following strikes on Iranian facilities raise concerns for Japan’s economy.
• Investors now turn their attention to Japan’s revised GDP figures and upcoming US inflation data.

USD/JPY trades around 158.10 on Monday at the time of writing, up 0.10% on the day, as markets react to heightened geopolitical tensions in the Middle East and sharp moves in the energy market.

Oil prices surged after air strikes carried out by the United States (US) and Israel on Iranian depots over the weekend. The West Texas Intermediate (WTI) US Oil price remains about 15% higher at around $101.00, although it has pulled back from an intraday high near $113.00 following reports that G7 members and the International Energy Agency (IEA) may discuss releasing emergency Oil reserves.

Higher Oil prices are generally negative for the Japanese currency. Japan is one of the world’s largest energy importers, meaning that a sustained increase in Oil costs could weigh on the country’s trade balance and economic outlook.

Japan’s Prime Minister Sanae Takaichi said on Monday that households are concerned about rising gasoline prices and that the government is exploring measures to mitigate the impact. However, she added that it is still difficult to assess how the Middle East war could affect Japan’s economy.

On the macroeconomic front, investors are focusing on the revised Gross Domestic Product (GDP) data for Japan’s fourth quarter, scheduled for release on Tuesday. Economists expect the revision to show growth of 0.3%, compared with the preliminary estimate of 0.1%, which could offer support to the Japanese Yen (JPY).

On the US side, the US Dollar (USD) remains firm amid risk-off sentiment and rising energy prices. The US Dollar Index (DXY), which measures the value of the Greenback against a basket of six major currencies, trades around 99.35 after touching a daily high near 99.70.

The conflict involving the United States, Israel and Iran has now entered its tenth day and continues to dominate global market sentiment. Escalating strikes and retaliatory attacks across the region are disrupting Oil flows through the Strait of Hormuz, increasing volatility in foreign exchange markets.

At the same time, expectations for interest rate cuts by the Federal Reserve (Fed) have been scaled back. Policymakers remain concerned about persistent inflation in the United States, and the recent surge in Oil prices reinforces the view that interest rates may need to stay higher for longer.

However, signs of economic weakness are also emerging. Last week’s labor market report showed job losses and a higher Unemployment Rate, raising fears of stagflation and complicating the Fed’s task as it balances inflation risks with a cooling economy.

Markets are now awaiting the release of the US Consumer Price Index (CPI) data for February on Wednesday, which could provide further clues about the direction of US monetary policy and the US Dollar’s trajectory against the Japanese Yen.