Japanese Yen pares recent gains due to wide US-Japan interest rate differential

USD/JPY pares its daily gains, still remaining in the positive territory and trading around 160.10 during the Asian hours on Monday. The Japanese Yen (JPY) has found a solid foothold in the wake of the geopolitical breakthrough. The reopening of the Strait of Hormuz caused oil prices to plunge to a two-month low, significantly easing inflationary pressures and reducing crippling import costs for energy-dependent economies like Japan.

However, the JPY's upside remains capped, as the substantial interest rate gap between Japan and the United States (US) continues to provide structural support to the USD/JPY pair. The JPY may receive further domestic support as traders price in a potential Bank of Japan (BoJ) interest rate hike on Tuesday to contain local inflation.

The USD/JPY pair depreciated as the US Dollar (USD) declined following reports that the United States (US) and Iran reached a deal to end their conflict, easing concerns about inflation and higher interest rates.

Following a landmark peace agreement between the United States (US) and Iran, market expectations for monetary policy have shifted dramatically. The CME FedWatch tool now indicates a nearly 47% probability that the Federal Reserve (Fed) will hold interest rates unchanged in December, a sharp increase from the 28% priced in just last week.

The deal, announced on Sunday by Washington and Tehran, is set to take effect this Friday. As part of the agreement, US President Donald Trump stated that the United States will lift its naval blockade on Iranian ports, allowing the critical Strait of Hormuz to reopen. In a coordinated response, the United Kingdom, France, Germany, and Italy announced they are prepared to lift sanctions on Iran following steps taken regarding its nuclear program.