The Japanese Yen (JPY) traded with a mild positive bias against its US counterpart for the second straight day on Monday (05/05) amid renewed safe-haven demand, although the gains lacked strong conviction. Despite signs of easing US-China trade tensions, US President Donald Trump's rapidly changing stance on trade policy kept investors cautious. Further, geopolitical risks weighed on investor sentiment and provided little support to the JPY. Moreover, a modest US Dollar (USD) weakness dragged the USD/JPY pair back closer to the 144.00 mark during the Asian session.
However, the Bank of Japan's (BOJ) dovish pause on Thursday might hold JPY investors back from placing aggressive bets. In fact, the BOJ cut its forecasts for economic growth and inflation for the current year, forcing market players to trim their bets for an imminent interest rate hike. Moreover, traders might refrain from placing aggressive bets against the USD and prefer to sit on the sidelines ahead of the two-day FOMC meeting starting on Tuesday. This could provide a boost for the USD/JPY pair and limit any correction from the multi-week highs hit on Friday.
The Japanese yen is benefiting from renewed safe-haven demand amid rising geopolitical risks and trade uncertainties.
China said last week that it is evaluating the possibility of trade talks with the US, fueling hopes of a potential de-escalation in tensions between the world's two largest economies. US President Donald Trump announced on Sunday a 100% tariff on all foreign-produced films.
Israeli Prime Minister Benjamin Netanyahu vowed to retaliate against Yemen's Iran-aligned Houthi rebels who fired a missile that landed near Ben-Gurion Airport. In response, Iranian Defense Minister Aziz Nasirzadeh said that Tehran would retaliate if the US or Israel attacked. Russian President Vladimir Putin said in a statement published on Sunday that Russia has enough power and resources to take the war in Ukraine to its logical conclusion. This kept geopolitical risks in play and drove safe-haven funds into the Japanese yen on Monday.
The Bank of Japan surprised with a dovish tone on Thursday, forcing investors to scale back their bets for a rate hike in June or July. However, broadening inflation in Japan and the prospect of continued wage gains keep the door open for further policy tightening by the BoJ.
The US dollar struggled to capitalize on Friday's modest gains that followed upbeat US jobs data, which showed the economy added 177,000 new jobs in April, compared with 130,000 expected. Other details of the report showed the Unemployment Rate remained unchanged at 4.2.
The data pointed to a resilient US labor market despite rising economic uncertainty due to Trump's tariffs and concerns about renewed price pressures. Traders pushed back their expectations for the Federal Reserve's rate-cutting cycle to resume to July from June.
However, this still marked a big difference compared with expectations for an additional BoJ rate hike in 2025 and should act as a boost for the lower-yielding JPY. Market focus now shifts to the two-day FOMC monetary policy meeting starting on Tuesday.(Newsmaker23)
Source: FXstreet
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