USD/JPY pars modest gains amid geopolitical risks, up slightly around 146.75-80 area

• USD/JPY starts the new week on a positive note, although any further buying is missing.
• Lingering geopolitical risks support the safe JPY and cap the major’s gains.
• Divergent BoJ-Fed policy expectations are also helping to keep bulls on edge.

USD/JPY is attracting some bearish buyers on the first day of a new week, although it is struggling to find support above the 147.00 level and capitalize on the upside. Sot prices are surrendering much of the intraday gains and are currently trading in a slight uptrend around the 146.75-146.80 region.

A former Bank of Japan (BoJ) board member, Makoto Sakurai, said the central bank would not be able to hike again in 2024 and predicted an interest rate hike by March 2025, citing recent market turmoil and the likelihood low of a rapid economic recovery. This comes on top of recent remarks by BoJ Deputy Governor Shinichi Uchida saying the central bank will not raise rates when markets are volatile and undermining the Japanese yen (JPY), lending some support to the USD/JPY pair.

Apart from this, a generally positive tone around the equity markets is weighing on the relatively safe status of the JPY, which, along with a modest rise in the US dollar (USD), is contributing to the tone of the auction around the USD/JPY pair. Meanwhile, the summary of the BoJ’s views from the July policy meeting, published last week, indicated that some members see room for further rate hikes and policy normalization. In addition, geopolitical risks are helping to limit deeper JPY losses and cap the USD/JPY pair.

In fact, the Israeli intelligence community believed that Iran had decided to attack Israel directly and may do so within days in retaliation for the assassination of Hamas leader Ismail Haniyeh in Tehran in late July. Additionally, US Defense Secretary Lloyd Austin told his Israeli counterpart Gallant in a call that he had ordered the USS Abraham Lincoln carrier strike group to expedite its transit to the Middle East and the USS Georgia guided-missile submarine to Central Command region.

This poses the risk of a further escalation of geopolitical tensions in the Middle East. Apart from this,
Growing bets for more interest rate cuts by the Federal Reserve (Fed) in September are preventing USD bulls from placing aggressive bets. This, in turn, is helping to keep a lid on USD/JPY amid relatively thin liquidity on the back of a holiday in Japan and a lack of economic data relevant to market movement.

Traders also appear reluctant and may prefer to wait on the sidelines ahead of this week’s release of US consumer inflation figures before placing new directional bets. The crucial CPI report will play a key role in influencing the Fed’s future policy decisions, which in turn should provide a significant boost to the greenback and the USD/JPY pair.