Japanese Yen bulls seem hesitant as Oil supply concerns counter upward revision of Q4 GDP

The USD/JPY pair attracts fresh sellers following a modest Asian session uptick to the 158.00 neighborhood and turns lower for the second consecutive day on Tuesday. Spot prices slide back closer to mid-157.00s following an upward revision of Japan's Q4 GDP growth figures and now seem to extend the overnight pullback from the highest level since January 23.

In fact, the Cabinet Office reported that the economy expanded an annualised 1.3% in the October-December period, compared to the initial estimates for a 0.2% rise. Furthermore, the quarterly print was also revised up to show an expansion of 0.3%, up from 0.1% preliminary reading. This comes on top of speculations that authorities might step in to stem further weakness in the Japanese Yen (JPY) and acts as a headwind for the USD/JPY pair.

Meanwhile, US President Donald Trump said late Monday that the US-Israeli war on Iran could be over very soon, which boosts investors' confidence. This, in turn, dents the US Dollar's (USD) status as the global reserve currency and turns out to be another factor weighing on the USD/JPY pair. The JPY bulls, however, seem reluctant to place aggressive bets as concerns about oil supply disruptions remain due to the closure of the Strait of Hormuz.

Given that Japan is one of the world’s largest energy importers, surging energy prices could weigh on the country’s trade balance and economic outlook. Furthermore, a sustained increase in Oil prices would drive up inflation and create a classic stagflationary environment, complicating the Bank of Japan's (BoJ) normalization efforts. This, in turn, might keep a lid on any meaningful JPY appreciation and help limit the downside for the USD/JPY pair.

Hence, it will be prudent to wait for strong follow-through selling before confirming that spot prices have topped in the near-term. Traders might also refrain from placing aggressive directional bets and opt to wait for the release of the latest US consumer inflation figures on Wednesday. The focus, however, will remain glued to geopolitical developments, which will play a key role in influencing Oil price dynamics and drive the broader risk sentiment.