Insights 
VT 
The Japanese Yen has extended its gains against the US Dollar, as the Greenback remains under pressure. This movement comes amidst easing geopolitical tensions following a ceasefire between Iran and Israel, reducing demand for the US Dollar as a safe haven.
USD/JPY trades below 145.00 but maintains support above its 100-day Moving Average. The Yen is recovering from its five-week low, aided by improved risk sentiment and softer Oil prices, which support Japan’s trade balance. Japan’s 10-year government bond yield has risen past 1.42%, reflecting stronger risk appetite.
Inflation and Monetary Signals
Japan’s core inflation data showed a rise for the third month in a row in May, reaching 3.7%, the highest since January 2023. This acceleration has reinforced expectations that the Bank of Japan may continue its tightening approach.
The US Dollar’s weakness is linked to easing geopolitical tensions and dovish signals from the Federal Reserve. President Trump’s announcement of a ceasefire helped calm markets and reduce flows into the Greenback. Fed officials’ recent comments suggest a potential rate cut, affecting the US Dollar Index.
Fed Chair Jerome Powell’s testimony before Congress is being closely watched for indications on future monetary policy. While his prepared remarks did not suggest an urgent rate cut, any changes in his live responses might affect the US Dollar and influence USD/JPY movements.
With the Yen firming up once again beneath the 145.00 mark, we’re watching a clear unwind of recent bullish USD positioning as broader risk sentiment improves. After weeks of steady buying into the Dollar on fear-driven momentum, the tone has decisively changed following subsiding tension in the Middle East. Though these shifts have reduced immediate safe-haven demand, the resulting calm has also allowed fundamentals to challenge the weaker side of recent trades.
Support remains around the 100-day moving average, a historically meaningful level that’s held through previous tests. The fact that USD/JPY hasn’t cleanly broken lower despite the Greenback’s retreat suggests some resilience remains. We’re noting that this area could become a battleground in the short term, particularly as opposing forces—tightening at the Bank of Japan versus potential easing from the Fed—begin to play out more assertively in pricing.
The yield on Japan’s 10-year government bond is now above 1.42%, and that’s not a trivial move for a market that has seen decades of ultra-low returns. This reflects not only the continuing shift in monetary expectations within the domestic economy but also rising confidence in Japan’s broader macro outlook. That includes a boost from falling oil prices, which, due to Japan’s energy import reliance, are effectively a stimulus in themselves.
Market Expectations and Speculative Flows
May’s 3.7% core inflation reading, the highest since early 2023, feeds into this picture. It’s the third straight monthly rise, and its persistence is hard to discount. For policymakers, this ups the pressure. While the Bank of Japan has been notoriously cautious in the past about removing accommodation, the data now offers little room for stalling if this inflation trend continues. Markets are increasingly pricing a scenario where additional action is not only possible but arguably necessary.
Across the Pacific, the narrative continues to lean in the opposite direction. With rate cut expectations hovering and the Fed’s recent tone shifting, the Dollar’s strength now appears far more fragile than even a few weeks prior. Comments from key Fed officials suggest cuts might come sooner than were pencilled in just last month, especially given softening employment and easing price pressures on the US domestic front.
Powell’s recent speech didn’t explicitly commit to any movement, and we’re aware that he remains methodical in his approach. That said, the real insights often come from his responses rather than the script. When he gave testimony before Congress, eyes weren’t on his prepared speech alone—markets were attuned to any hints of deviation when challenged by lawmakers. Any suggestion of timing, even indirect, could prompt a short-term repricing in rate expectations, and this in turn would flow through quickly into Dollar-denominated pairs.
For those active in derivatives tracking USD/JPY, the current environment requires a clear awareness of cross-asset cues—specifically, what bond markets are saying, what inflation is actually showing rather than forecasted, and how pricing on risk reversals and options skew reflects directional conviction. Traders should be careful not to overly interpret single-day moves unless confirmed by both volume and broader positioning data. Volatility remains compressed, but only superficially so; any shift in messaging—either by Powell through upcoming appearances or via the next BoJ adjustment—could ignite fast reactions.
We’re proceeding with particular attention on the yield differential between US and Japanese Government bonds, which continues to narrow. This narrows the carry argument in favour of the Dollar and invites increased speculative flows into the Yen. Watching open interest and momentum indicators should help avoid misreading short-covering as trend change.
