Japanese Yen hangs near one-month low vs USD as Mideast tensions counter strong PPI print

The USD/JPY pair enters a bullish consolidation phase during the Asian session on Wednesday and moves little following the release of Japan's stronger-than-expected Producer Price Index (PPI). Spot prices currently trade just below mid-160.00s, or the highest since late April, as traders look to the US consumer inflation figures for fresh impetus.

The crucial US Consumer Price Index (CPI) will influence expectations about the Federal Reserve's (Fed) future policy path amid worries that the war-driven rise in energy prices would rekindle inflationary pressures. This, in turn, would drive the US Dollar (USD) and the USD/JPY pair. In the meantime, growing acceptance that the US central bank would raise borrowing costs by the end of this year, along with persistent geopolitical uncertainties, continues to act as a tailwind for the safe-haven buck.

In fact, the US military launched strikes against Iran, as ordered by US President Donald Trump, in retaliation for the shooting down of an American helicopter in the Strait of Hormuz. Adding to this, the lack of progress in US-Iran negotiations tempers hopes for a peace deal. This adds to worries that Japan's economy will remain under strain due to the Middle East conflict, which offsets bets that the Bank of Japan (BoJ) will tighten its monetary policy and continue to undermine the Japanese Yen (JPY).

In fact, markets now seem to have fully priced in the possibility that the BoJ will raise interest rates at its meeting on June 15-16. The bets were lifted by data showing that Japan’s PPI rose more than expected in May, underscoring persistent cost pressures from higher energy and raw material imports. This, along with speculations that Japanese authorities might step in again to prop up the domestic currency, holds back the JPY bears from placing fresh bets and caps the upside for the USD/JPY pair.