USD/JPY trades flat as markets weigh US-Iran war and energy supply risks
- USD/JPY holds steady as the US Dollar softens.
- Japan’s heavy reliance on Middle East energy supplies remains a key concern.
- Investors await Japan PPI, US CPI and US PCE inflation data.
The Japanese Yen (JPY) trades flat against the US Dollar (USD) on Tuesday, with USD/JPY giving up earlier gains as the Greenback edges lower. However, the Yen struggles to capitalize on the Dollar’s weakness as ongoing Oil supply disruptions linked to the escalating US-Iran war pose a risk to Japan’s economic outlook, given the country’s heavy reliance on imported energy.
At the time of writing, the pair is consolidating around 157.60, while the US Dollar Index (DXY), which tracks the Greenback’s value against a basket of six major currencies, is trading near 99.63, after touching its highest level in more than three months at 99.70 on Monday.
The US Dollar weakens after US President Donald Trump signaled that the war could end “very soon.” Trump also said the United States could waive some Oil-related sanctions and deploy the US Navy to escort commercial tankers through the Strait of Hormuz.
Since the conflict began, Oil prices have surged significantly amid concerns over supply disruptions in the Middle East. However, prices eased following Trump’s remarks and reports that G7 countries are discussing a coordinated release of Oil reserves through the International Energy Agency (IEA).
The decline in Oil prices has helped calm market concerns about rising global inflation. That said, uncertainty remains elevated after Iran warned it would not allow Oil shipments through the Strait of Hormuz if US and Israeli attacks continue.
This threat keeps markets on edge, especially in Japan, which imports around 95% of its crude oil from the Middle East, with roughly 70% of those shipments passing through the Strait of Hormuz.
Looking ahead, volatility in Oil markets is likely to persist unless there is greater clarity on a resolution to the conflict. The uncertainty is also clouding the monetary policy outlook across major economies, with markets increasingly expecting the Bank of Japan (BoJ) to delay further rate hikes, while the Federal Reserve (Fed) may keep interest rates unchanged for longer.
On the data front, US ADP Employment Change data released on Tuesday showed the 4-week average rising to 15.5K from the previous 12.8K. Meanwhile, Japan’s Gross Domestic Product (GDP) grew 0.3% QoQ in Q4, in line with expectations and up from 0.1% in the previous quarter. Annualized GDP expanded by 1.3%, accelerating from 0.2% and beating the 1.2% forecast.
Market attention now turns to Japan’s Producer Price Index (PPI) and the US Consumer Price Index (CPI) figures due on Wednesday, followed by the US Personal Consumption Expenditures (PCE) Price Index on Friday.
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
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