USD/JPY stabilizes near recent high amid Oil-driven inflation support

USD/JPY trades around 159.45 on Thursday, virtually unchanged on the day but still close to recent highs after three consecutive bullish days. The pair remains supported by the strength of the US Dollar (USD) in a context of persistent geopolitical tensions around the Strait of Hormuz, which are keeping energy prices elevated.

The US Dollar benefits from this environment as investors anticipate a lasting inflationary impact from higher Oil prices. This scenario reduces the likelihood of near-term monetary easing by the Federal Reserve (Fed), with markets now pricing a high chance that interest rates will remain on hold toward year-end. This dynamic supports the Greenback and underpins the upside in USD/JPY.

Recent US macroeconomic data also point to resilient activity. The S&P Global Purchasing Managers Index (PMI) releases indicate stronger-than-expected expansion in both manufacturing and services, confirming the relative strength of the US economy despite a slight uptick in weekly Initial Jobless Claims.

On the Japanese side, the Japanese Yen (JPY) remains under pressure. Japan’s heavy reliance on energy imports amplifies the negative impact of rising Oil prices on the economy, while expectations for monetary tightening by the Bank of Japan (BoJ) continue to be pushed back. Markets now largely expect a pause at the upcoming meeting, with a potential rate hike delayed until later in the year.

MUFG analysts highlight that the energy shock linked to Middle East tensions could continue to weigh on the Japanese Yen in the near term, while increasing the risk of imported inflation. At the same time, Danske Bank notes that domestic inflation in Japan remains relatively subdued compared to global trends, limiting the BoJ’s room to tighten policy quickly.

Finally, the prospect of intervention by Japanese authorities in the foreign exchange market remains a source of caution for investors. Policymakers have recently reiterated their vigilance regarding JPY weakness, which could cap any rapid move beyond the key 160 psychological level.