Japanese Yen struggles for traction despite weaker US Dollar amid elevated Energy costs

USD/JPY consolidates on Monday after opening the week with a bearish gap as the US Dollar (USD) comes under pressure amid growing optimism that the United States (US) and Iran are moving closer toward a deal that could eventually reopen the Strait of Hormuz. At the time of writing, the pair is trading around 158.90, remaining confined within its recent one-week range.

Fresh hopes for de-escalation in the Middle East emerged over the weekend after several news reports suggested Washington and Tehran were making progress toward a temporary framework agreement aimed at ending the war. A potential deal reportedly includes a 60-day ceasefire extension, the reopening of the Strait of Hormuz and the removal of the US naval blockade to Iranian ports, while negotiations over Iran’s nuclear program would continue.

The latest developments send Oil prices lower, with West Texas Intermediate (WTI) slipping to its lowest level since May 7, while the US Dollar Index (DXY), which tracks the Greenback's value against a basket of six major currencies, retreats toward the 99.00 mark.

However, the Japanese Yen (JPY) is struggling to benefit from the softer US Dollar as Energy prices remain well above pre-conflict levels, continuing to pressure Japan’s import-dependent economy. Even if a deal is eventually reached and the Strait of Hormuz fully reopens, restoring shipping flows and normalizing supply chains could take time, leaving the Yen vulnerable to elevated Energy costs in the near term.

Japanese Prime Minister Sanae Takaichi said on Monday that the government will introduce support measures to curb household electricity and gas bills from July through September. Takaichi added that Japan will compile an extra budget worth more than ¥3 trillion, with around ¥500 billion allocated specifically for electricity and gas subsidies.

At the same time, upside in USD/JPY also appears limited as traders remain cautious about the risk of intervention by Japanese authorities near the 160.00 handle, following the sharp Yen-buying moves seen in late April when the pair briefly climbed above that level.

Still, the broader upside bias in USD/JPY remains supported by the wide interest rate differential between the Federal Reserve (Fed) and the Bank of Japan (BoJ). Recent Oil-driven inflation concerns have reinforced expectations that the Fed could remain patient on rate cuts and keep interest rates higher for longer, while the BoJ is expected to maintain a gradual pace of policy normalization.