Japanese Yen Rises as Safe-Haven Demand Returns; BoJ’s Dovish Outlook May Limit Upside.
The Japanese Yen (JPY) continued to strengthen on Monday amid rising geopolitical tensions and global risk aversion, although the Bank of Japan’s dovish stance and anticipation surrounding the upcoming Federal Open Market Committee (FOMC) meeting may temper gains.
Safe-Haven Flows Boost Japanese yen as Global Tensions Escalate
For a second consecutive day, the Japanese Yen attracted buyers, benefiting from a resurgence in safe-haven demand amid increasing geopolitical risks. The USD/JPY pair retreated toward the 144.00 psychological mark in the early hours of the Asian session as investors sought refuge from a risk-laden global landscape.
Tensions flared over the weekend, contributing to growing investor anxiety:
- In the Middle East, Israeli Prime Minister Benjamin Netanyahu pledged retaliation following a missile strike by Yemen’s Iran-aligned Houthi rebels near Ben-Gurion Airport.
- Iran’s Defence Minister Aziz Nasirzadeh responded assertively, warning that any aggressive move by the US or Israel would provoke counterattacks from Tehran.
- On the Eastern European front, Russian President Vladimir Putin reiterated that Russia has the resources to pursue the conflict in Ukraine to a “logical conclusion,” renewing market concerns about prolonged instability in the region.
These developments have revived safe-haven buying interest, particularly in the Japanese Yen, known for its stability in times of geopolitical unrest.
Trump’s Tariff Policy Fuels Uncertainty Despite US-China Trade Hopes
Risk sentiment was further dampened by erratic trade signals from the United States. Over the weekend, US President Donald Trump declared a sweeping 100% tariff on all foreign-produced movies, adding fresh uncertainty to global trade dynamics. This announcement overshadowed slightly positive developments in US-China trade relations. Last week, China signaled openness to restarting trade negotiations, which had briefly buoyed markets with hopes of de-escalation.
Trump’s unpredictable trade agenda has injected renewed volatility into global markets, pushing investors toward traditional safe havens such as the JPY and gold. As a result, even modest signs of risk aversion are driving disproportionate demand for the Yen.
BoJ’s Dovish Pause Prevents Further JPY Rally—For Now
Despite the JPY’s recent strength, the Bank of Japan’s (BoJ) latest policy stance has reined in expectations for a sustained rally. Last Thursday, the BoJ surprised markets by opting for a dovish pause, holding off on further tightening while acknowledging progress in inflation trends and wage negotiations.
While the central bank left the door open for additional rate hikes later in 2025, investors quickly recalibrated their near-term expectations. The shift prompted traders to scale back bets on a rate increase in June or July. As a result, any additional JPY gains remain capped in the absence of more decisive hawkish signals from the BoJ.
Still, the broader inflation picture in Japan, combined with evidence of robust wage growth, suggests that future policy tightening remains a viable scenario, especially if global inflation proves sticky or geopolitical shocks intensify further.
USD Under Pressure as Market Eyes FOMC, ISM Services PMI
On the other side of the USD/JPY equation, the US Dollar has slipped modestly from Friday’s highs, unable to build on momentum from stronger-than-expected April jobs data. The Nonfarm Payrolls report revealed the addition of 177,000 jobs versus the 130,000 anticipated, with the unemployment rate holding steady at 4.2%.
While this data reinforced the resilience of the US labor market, it did little to alter the broader outlook for Federal Reserve policy. Markets had already pushed back expectations for the next rate cut to July, following concerns about resurging inflation due to Trump’s tariff moves and mixed macro signals.
Investors remain hesitant to make large directional bets ahead of this week’s crucial two-day FOMC meeting, which begins Tuesday. Traders are keenly awaiting the Fed’s updated policy language, particularly regarding inflation risks and the timing of future rate cuts. Monday’s US ISM Services PMI could provide a further clue on the state of the economy, particularly the strength of consumer demand and inflationary pressure in the services sector.
USDJPY Technical Picture: A Cautious Pullback Amid Uncertainty
Technically, the USD/JPY pair’s retreat toward 144.00 indicates a softening bullish bias in the short term. However, analysts warn that the decline may be temporary, particularly if the FOMC delivers a more hawkish-than-expected message this week.
The pair remains vulnerable to fresh bouts of risk aversion, which could reignite demand for the JPY. However, without strong policy support from the BoJ or a significant shift in global rate differentials, sustained downside in USD/JPY may prove limited. As such, traders should exercise caution in interpreting the recent pullback as a definitive trend reversal.
Outlook: All Eyes on the Fed and BoJ’s Next Move
As the market heads into the FOMC week, the interplay between global risk sentiment, US rate expectations, and Japanese central bank policy will remain pivotal for the USD/JPY outlook.
On the one hand, a hawkish Fed and a dovish BoJ could widen yield differentials, favoring the USD. On the other hand, an escalation in geopolitical tensions—especially in the Middle East or Eastern Europe—could keep the JPY bid, regardless of rate differentials.
Key Themes to Watch This Week:
- Outcome and tone of the FOMC meeting
- ISM Services PMI and inflation-related data from the US
- Further signals from the BoJ about future rate plans
- Geopolitical developments involving Israel, Iran, and Russia
- Any new trade announcements from the Trump administration.
https://voiceoftraders.com/analysis/gold-reclaims-3260-trade-hopes-fuel-intraday-rebound
