The USD/JPY pair may experience an upward movement as recovering oil prices exert pressure on the Yen, considering Japan’s significant dependence on oil imports. US interception of Iranian missiles has reignited geopolitical tensions in the Middle East, raising concerns about inflation. Market participants are pricing in a 76.6% probability of a rate hike in September, which suggests that borrowing costs will remain high. USD/JPY experiences a decline following slight increases observed the prior day, currently trading near 163.70 in the Asian session on Wednesday. The pair may regain ground as the Japanese Yen could face pressure from rebounding oil prices.
Renewed hostilities in the Middle East have reignited geopolitical tensions, maintaining investor focus on inflationary risks and the broader interest rate outlook. Crucially, as a significant net importer of oil, Japan continues to be especially susceptible to increasing energy expenses. Traders are poised for the forthcoming inflation and labour market data emanating from Tokyo. Year-over-year Tokyo CPI excluding fresh food is anticipated to rise to 1.7% in July, an increase from the prior rate of 1.6%. Meanwhile, headline inflation was recorded at 1.7%, while the CPI excluding both food and energy registered at 1.9%. On the employment front, Japan’s unemployment rate is projected to remain unchanged at 2.5%.
Additionally, the USD/JPY pair may appreciate as the US Dollar could find support from escalating risk aversion, stemming from an Iranian attack targeting US troops stationed across the region, with Iran firing multiple ballistic missiles toward a US base in Jordan around 5:45 pm. According to statements and video footage released by the US military, all of the surprise IRGC missiles were successfully intercepted. The strike is widely perceived as a direct reaction to recent US actions aimed at Iranian navy boats. Investors are keeping a tight eye on the Federal Reserve’s impending policy announcement, since it is generally anticipated that interest rates would remain unchanged.
Despite repeated calls from US President Donald Trump for lower interest rates, market sentiment remains cautious; traders are currently pricing in a 30.5% chance of an immediate rate hike, reflecting an unusually high level of uncertainty so close to a policy announcement. Looking further ahead, markets are also factoring in a 76.6% probability of a rate increase in September, reinforcing expectations that borrowing costs could remain elevated for an extended period.